SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   -----------

                                  FORM 10-KSB40

(MARK ONE)



       [x]         ANNUAL  REPORT  UNDER  SECTION 13 OR 15(D) OF THE  SECURITIES
                   EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JULY 31, 1999

                                       OR

       [ ]         TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
                   EXCHANGE ACT OF 1934 FOR THE TRANSITION  PERIOD FROM ----- TO
                   ------

                           Commission File No. 1-13851

                                   -----------

                                   SONUS CORP.

                 (Name of small business issuer in its charter)

            YUKON TERRITORY, CANADA                    NOT APPLICABLE
       (State or other jurisdiction of      (I.R.S. employer identification no.)
        incorporation or organization)

        111 S.W. FIFTH AVENUE, SUITE 1620                         97204
                PORTLAND, OREGON                                (Zip code)
    (Address of principal executive offices)


                                 (503) 225-9152
                (Issuer's telephone number, including area code)

         Securities registered under Section 12(b) of the Exchange Act:


<TABLE>
<S>                                             <C>
            Title of Each Class                 Name of Each Exchange on Which Registered
            -------------------                 -----------------------------------------
COMMON SHARES, WITHOUT NOMINAL OR PAR VALUE              AMERICAN STOCK EXCHANGE
</TABLE>

       Securities registered under Section 12(g) of the Exchange Act: NONE

                                   -----------

         Check  whether  the issuer:  (1) has filed all  reports  required to be
filed by Section 13 or 15(d) of the  Securities  Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports),  and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]

         Check if no  disclosure of  delinquent  filers  pursuant to Item 405 of
Regulation S-B is contained herein, and no disclosure will be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. [X]

         State  the  issuer's   revenues  for  its  most  recent   fiscal  year:
$33,759,000.

         State the aggregate  market value of the voting and  non-voting  common
equity held by  non-affiliates  of the registrant,  computed by reference to the
price at which the common equity was sold, or the average bid and asked price of
such common equity, as of October 18, 1999: $21,577,128.

         State the number of shares  outstanding of each of the issuer's classes
of common equity: Common Shares, without nominal or par value, 6,109,026 shares,
as of October 18, 1999.

         Transitional Small Business Disclosure Format: Yes [ ] No [X]

                      DOCUMENTS INCORPORATED BY REFERENCE:

         Portions of the issuer's definitive Management Information Circular and
Proxy Statement dated November 9, 1999, are  incorporated by reference into Part
III of this Form 10-KSB.


<PAGE>

                                TABLE OF CONTENTS

<TABLE>
                                                                                                                      PAGE

<S>                                                                                                                      <C>
PART I.....................................................................................................................1
ITEM 1. Description of Business............................................................................................1
ITEM 2. Description of Property...........................................................................................10
ITEM 3. Legal Proceedings.................................................................................................10
ITEM 4. Submission of Matters to a Vote of Security Holders...............................................................10
PART II...................................................................................................................11
ITEM 5. Market for Common Equity and Related Stockholder Matters..........................................................11
ITEM 6. Management's Discussion and Analysis or Plan of Operation.........................................................13
ITEM 7. Financial Statements..............................................................................................18
ITEM 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..............................39
PART III..................................................................................................................40
ITEM 9. Directors, Executive Officers, Promoters, and Control Persons; Compliance with Section 16(a) of the Exchange Act..40
ITEM 10. Executive Compensation...........................................................................................40
ITEM 11. Security Ownership of Certain Beneficial Owners and Management...................................................40
ITEM 12. Certain Relationships and Related Transactions...................................................................40
ITEM 13. Exhibits and Reports on Form 8-K.................................................................................40
</TABLE>

                                      -i-
<PAGE>

                           FORWARD-LOOKING STATEMENTS

         Statements  in  this  report,  to the  extent  they  are not  based  on
historical  events,  constitute  forward-looking   statements.   Forward-looking
statements  include,   without  limitation,   statements  containing  the  words
"believes,"  "anticipates,"  "intends,"  "expects," and words of similar import.
Investors  are  cautioned  that  forward-looking  statements  involve  known and
unknown  risks,  uncertainties  and other  factors  that may  cause  the  actual
results,  performance,  or  achievements  of Sonus Corp.  (the  "Company") to be
materially  different from those  described  herein.  Factors that may result in
such variance, in addition to those accompanying the forward-looking statements,
include  economic  trends in the  Company's  market  areas,  the  ability of the
Company to manage its growth and integrate new acquisitions  into its network of
hearing  care  centers,  development  of new or  improved  medical  or  surgical
treatments for hearing loss or of technological advances in hearing instruments,
changes in the application or interpretation  of applicable  government laws and
regulations,  the ability of the Company to complete additional  acquisitions of
hearing  care  centers  on  terms  favorable  to  the  Company,  the  degree  of
consolidation in the hearing care industry,  the Company's success in attracting
and  retaining  qualified  audiologists  and staff to operate its  hearing  care
centers,  the ability of the Company to attract  audiology  centers as franchise
licensees under The Sonus Network,  product and  professional  liability  claims
brought  against  the  Company  that  exceed  its  insurance  coverage,  and the
availability of and costs  associated with potential  sources of financing.  The
Company  disclaims  any  obligation  to update any such  factors or to  publicly
announce the result of any  revisions to any of the  forward-looking  statements
contained herein to reflect future events or developments.

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS.

OVERVIEW

         The Company was incorporated under the laws of the Province of Alberta,
Canada,  in July 1993,  under the name "575035 Alberta Ltd." The Company changed
its name to HealthCare  Capital  Corp.  in October  1994,  when it acquired nine
hearing care centers in British Columbia. The Company did not begin operating in
the United  States until it purchased two hearing care centers near Santa Maria,
California,  in July 1996. By vote of the shareholders,  the Company changed its
name from HealthCare  Capital Corp. to Sonus Corp. in February 1998, and changed
its  jurisdiction of  incorporation  from Alberta,  Canada,  to Yukon Territory,
Canada, in December 1998. The Company, through its subsidiaries Sonus-USA,  Inc.
("Sonus-USA"),   Sonus-Texas,   Inc.  ("Sonus-Texas"),   and  Sonus-Canada  Ltd.
("Sonus-Canada"),  currently  owns and  operates 99 hearing  care centers in the
United  States and Western  Canada.  Centers owned by the Company are located in
the states of Arizona,  California,  Illinois,  Michigan,  Missouri, New Mexico,
Oregon,  Texas, and Washington and in the Canadian provinces of British Columbia
and Alberta.  The Company  intends to expand its network of hearing care centers
by acquiring centers in its existing as well as new geographic markets.

         Each  of the  Company's  hearing  care  centers  provides  its  hearing
impaired  patients  with a full range of  audiological  products  and  services.
During the fiscal year ended July 31, 1999,  approximately  86% of the Company's
revenues  were  derived  from  product  sales,  including  hearing  instruments,
batteries, and accessories,  10% were derived from audiological services, and 4%
were from other sources.

                                      -1-
<PAGE>

Substantially  all of the  Company's  hearing  care  centers  are  staffed  with
audiologists.  The Company's operating strategy is to provide patients with high
quality and  cost-effective  hearing care while at the same time  increasing its
operating margins by attracting and retaining patients, recruiting qualified and
productive  audiologists and hearing instrument dispensers,  achieving economies
of scale and administrative  efficiencies,  and pursuing large group and managed
care  contracts.  The Company  believes  that it is well  positioned  to provide
retail hearing rehabilitative services to consumers while simultaneously serving
the  diagnostic  needs of referring  physicians  and meeting the access and cost
concerns of managed care providers and insurance companies.

         The Company,  through its subsidiary Hear PO Corp., also operates as an
independent provider association and hearing care benefit administrator. Hear PO
Corp.  obtains  contracts to provide hearing care benefits to managed care group
and  corporate  health  care  organizations   through  its  approximately  1,100
affiliated audiologists,  sells Hear PO brand private label hearing instruments,
and operates as a buying group for its affiliated audiologists.

         The Company, through Sonus-USA,  operates a franchise licensing program
called  The Sonus  Network.  Licensees  are  entitled  to use the Sonus name and
receive other benefits such as practice  management  advice and training,  group
buying discounts, and marketing services. There are currently 64 licensees under
the licensing program with 116 locations in 20 states.

         In August 1999, the Company launched its e-commerce program through its
internet  site  at  www.sonus.com.   Products  that  can  be  purchased  through
www.sonus.com include gift certificates, hearing instrument batteries, assistive
listening  devices,   hearing  protection  items,   educational  materials,  and
audiology  equipment,   supplies  and  accessories.   Audiologists  and  hearing
instrument  dispensers can also purchase hearing instruments for resale to their
patients.  The Company believes that e-commerce poses substantial  opportunities
for revenue growth and intends to continue to devote  resources to enhancing its
web site and increasing product availability and differentiation.

INDUSTRY BACKGROUND

Professionals  and  Centers.  Hearing  instruments  may be dispensed by either a
dispensing audiologist or a hearing instrument specialist ("HIS"). Although both
audiologists  and  HISs  may  be  licensed  to  dispense  hearing   instruments,
audiologists  have  advanced  training in audiology and hold either a masters or
Ph.D. degree.

         The June 1998 issue of The Hearing  Review,  a hearing  industry  trade
journal,  indicates that  approximately  24% of HISs in the U.S. are at least 61
years of age,  30% are 51-60  years of age,  33% are 41-50 years of age and only
13% are age 40 or under,  compared to 5%, 21%,  45% and 29%,  respectively,  for
dispensing  audiologists.  The  Company  believes  that  many  HISs  are  facing
retirement  with  no  formal   "exit-strategy,"  a  situation  that  creates  an
attractive investment opportunity for the Company.

         The typical hearing care practice wields little  purchasing  power with
manufacturers, and must spread overhead over a relatively small revenue base. In
addition,  a typical  hearing care practice  often has  insufficient  capital to
purchase new  technologies  and lacks the systems and size  necessary to develop
economies  of  scale.  As  a  result,   the  Company  believes  that  dispensing
audiologists  and  HISs  will  find it  increasingly  attractive  to sell  their
practices to or affiliate with larger organizations, such as the Company.

                                      -2-
<PAGE>

         Another  factor  that may  favor  the  consolidation  of  hearing  care
practices is managed care. As managed care becomes more pervasive,  hearing care
professionals  will have an even  greater  need for the  information  resources,
management  expertise,  economies  of scale,  and access to  managed  care group
contracts  that larger  organizations  such as the Company may be better able to
provide. However, managed care is not presently a large part of the hearing care
market and  hearing  care  products  and  services  are likely to continue to be
provided predominantly on a private pay basis for the next several years.

         Notwithstanding  the factors  favoring  consolidation  of hearing  care
practices,  there are currently only a few multiple center networks operating in
more than one state or  province in the United  States or Canada  with  combined
annual revenues in excess of $5 million.

Hearing  Impaired  Population.  According to the 1996  edition of  Communication
Facts, published by the American Speech-Language Hearing Association, the number
of  persons  in the  United  States who have  hearing  loss is  estimated  to be
approximately  28 million and the percentage of individuals  with a hearing loss
relative to the general  population is approximately 2% for those under 18 years
of age, 5% for those  between 18 and 44 years of age,  14% for those  between 45
and 64 years of age,  23% for those  between 65 and 74 years of age, and 32% for
those over 75 years of age.  In  addition,  the  American  Tinnitus  Association
estimates that approximately 12 million American adults have tinnitus (a ringing
sensation in the ears) that is severe enough to seek medical help.

         The  Company  believes  that the widely  recognized  demographic  trend
toward an aging population will increase the demand for hearing instrument sales
and audiological  services and that the demand for hearing  instruments that are
less visible and for newer and superior hearing instrument  technology,  such as
digital and  programmable  hearing  instruments,  will also contribute to market
growth.  In addition,  the Company believes that some individuals  forgo hearing
care  because  of the  stigma of aging  that can be  associated  with  wearing a
hearing  instrument and that the demand for hearing instrument sales and hearing
care  services can be increased by marketing  and  education  designed to reduce
that stigma.

Hearing Health Care Industry Segments.  The hearing health care industry serving
patients  with  hearing and balance  disorders  is  comprised  of four  distinct
service segments:

         hearing   rehabilitation   services,   including  the   evaluation  and
         rehabilitation  of  persons  with  hearing   impairments  by  assessing
         communicative impairment and providing amplification;

         advanced  audio-diagnostic  services,  including  the  neuro-audiologic
         evaluation and non-medical diagnosis of hearing and balance disorders;

         industrial and  preventative  audiological  services,  including  noise
         level measurements, dosimetry, and hearing screenings; and

         otolaryngologic   services,   including   surgery  and  other   medical
         treatment.

         The  Company's  centers   primarily   provide  hearing   rehabilitation
services. The Company has two facilities,  one located in Calgary,  Alberta, and
the other in Orange County,  California,  that provide advanced audio-diagnostic
services  and  one  center  located  in San  Diego,  California,  that  provides
evaluation and treatment for patients with  tinnitus.  The Company also operates
the Sonus Hearing Institute,  a state-of-the art hearing healthcare research and
training  facility,  adjacent to the  Company's  corporate  offices in Portland,
Oregon.

                                      -3-
<PAGE>

         Hearing   rehabilitation    services   include   the   assessment   and
rehabilitation  of persons with hearing  impairments  through the use of hearing
instruments and counseling.  Rehabilitation  services,  including  amplification
systems, are provided by audiologists and HISs. The services offered include the
diagnostic audiological testing,  fitting and dispensing of hearing instruments,
follow-up rehabilitative  assistance,  the sale of hearing instrument batteries,
hearing instrument  repairs,  and the sale of swim plugs,  custom ear plugs, and
assistive listening devices.

         Advanced   audio-diagnostic   services   include  the   assessment  and
non-medical  treatment of vestibular and balance disorders and the evaluation of
patients with specific symptoms of an auditory or vestibular disorder, including
hearing loss,  tinnitus,  and balance problems.  In order to make a differential
diagnosis of hearing disorders,  an ear, nose and throat physician may employ or
refer patients to an audiologist to conduct special  diagnostic hearing tests to
differentiate between conductive, sensory, and neural pathology. If the cause of
the hearing loss is a medical  disorder in either the nervous system (neural) or
the middle ear  (conductive),  the physician  proceeds  with medical  treatment.
However,  if a non-treatable  conductive or sensory loss is found, the physician
will generally refer the patient to an audiologist for rehabilitation.

GROWTH STRATEGY

         The Company's  growth  strategy  involves  expanding its  operations by
selectively  acquiring  hearing  centers  located  in  existing  as  well as new
geographic markets and by increasing the number of licensees under the Company's
franchise licensing program.  The Company believes that the fragmented nature of
the hearing  care  industry,  the absence of  industry-wide  standards,  and the
inexperience  and limited  capital  resources of many  hearing  care  providers,
combine to provide an opportunity to build an expanding network of Company-owned
and  licensed  hearing care centers  devoted to providing  high-quality  hearing
health care services.

         The  Company  works to expand its network of  Company-owned  centers in
each new market by initially  targeting for  acquisition  a significant  hearing
care  practice  in order  to  secure a solid  foundation  upon  which to build a
regional  network of  audiology  practices.  The  Company  then seeks to acquire
additional  individual or group practices in order to realize economies of scale
in management, marketing, and administration, in hopes that its initial purchase
in the region will  attract  other  practitioners  interested  in selling  their
businesses. Due to the contacts of management with audiologists in the industry,
the Company is frequently  presented with  opportunities to acquire hearing care
centers.  From August 1, 1996, to September 30, 1999,  the Company  acquired 108
centers, all located in the United States.

         The Company looks at the following  factors before acquiring centers in
a particular  geographic  market:  (a)  population  size and  distribution;  (b)
audiology  practice  density,  saturation  and  average  group  size;  (c) local
competitors;  (d) level of managed care penetration;  and (e) local industry and
economy. In acquiring particular centers within a geographic market, the Company
seeks centers with the following  characteristics:  (a) an  established  patient
base drawing from a substantial metropolitan population; (b) significant revenue
and  profitability  prior to  acquisition;  and (c)  above-average  potential to
enhance center profitability after acquisition.

         Prior to acquiring a hearing care  center,  the Company  conducts a due
diligence  investigation of the center's  operations that includes an analytical
review of the center's financial  statements,  tax returns,  and other operating
data, a review of patient  files on a random  sample  basis,  a review of credit
reports,  contracts, bank deposits, and other documents and information that the
Company deems significant,  and the preparation of financial projections.  Based
on the information  collected and analyzed during the due diligence review,  the
Company determines an appropriate purchase price for the acquisition.

                                      -4-
<PAGE>

         The Company generally uses cash, promissory notes,  assumption of debt,
or a combination of the foregoing to fund acquisitions. The amount paid for each
practice  varies on a  case-by-case  basis  according  to  historical  revenues,
projected   earnings  after  integration  into  the  Company,   and  transaction
structure.   In  connection  with  each   acquisition,   the  Company   acquires
substantially  all of the assets of the  practice,  including  its  audiological
equipment and supplies, office lease and improvements, and patient files. At the
time a practice is acquired,  the audiologists and hearing instrument dispensers
associated with the practice typically become employees of the Company.

         There can be no assurance  that the Company will be able to continue to
complete  acquisitions  consistent  with its expansion  plans,  that such future
acquisitions will be on terms favorable to the Company, or that the Company will
be able to successfully integrate the hearing care centers that it acquires into
its business.  Successful  integration is dependent upon  maintaining  payor and
customer  relationships and converting the management information systems of the
centers the Company  acquires to the Company's  systems.  Significant  expansion
could place excessive strain on the Company's managerial and other resources and
could  necessitate  the  hiring  of  additional  managerial  and  administrative
personnel.  Unforeseen  problems with future  acquisitions  or failure to manage
expansion  effectively  may have a  material  adverse  effect  on the  business,
financial condition, and results of operations of the Company.

OPERATING STRATEGY

         The Company's  operating  strategy is to provide its patients with high
quality and cost effective  hearing care products and services while at the same
time  increasing  its operating  margins by attracting  and retaining  patients,
recruiting qualified and productive  audiologists,  achieving economies of scale
and  administrative  efficiencies,  and  pursuing  large group and managed  care
contracts.

Attracting and Retaining Patients. The Company seeks to attract new patients and
retain  existing  patients at each center by providing  patients with  friendly,
comprehensive,   and  cost-effective   hearing  care  at  convenient  times  and
locations. In addition, by educating patients about hearing health issues and by
providing quality service during office visits and consistent  patient follow-up
and  support,  the Company  hopes to foster  patient  loyalty and  increase  the
likelihood of obtaining referrals and repeat visits for examinations and product
purchases.

Recruiting Qualified and Productive  Audiologists.  Audiologists employed by the
Company  are  primarily  responsible  for  center  profitability  as well as for
attracting and retaining customers. The Company seeks to employ audiologists who
share the Company's goal of delivering high-quality hearing care service and who
are also dedicated to expanding and enhancing their  practices.  The Company has
developed an intensive  four-week in-house training course called the Greenhouse
Program(R) for its  audiologists  that focuses on clinical  audiology  skills as
well as private  practice  business  management.  The Company  believes that the
Greenhouse  Program(R)  can  significantly  increase  employee  performance  and
improve  customer  service.   The  Company  also  believes  that  it  can  offer
significant benefits to private practice audiologists by providing assistance in
administrative  tasks associated with operating an audiology  practice,  thereby
allowing them to focus on serving patients and increasing productivity.

                                      -5-
<PAGE>

Achieving  Economies of Scale and Administrative  Efficiencies.  A key operating
strategy  of  the  Company  is to  achieve  increased  economies  of  scale  and
administrative efficiencies at each of its centers. When a center is acquired by
the Company, it immediately has available to it terms and discounts with hearing
instrument  manufacturers  that  are  generally  more  favorable  than it  could
negotiate independently.  In addition, the Company believes that by centralizing
certain  management and  administrative  functions  such as marketing,  billing,
collections,  human resources, risk management,  payroll, and general accounting
services, the profitability of a center can be improved by spreading the cost of
such  functions over a larger revenue base. The Company has developed an on-line
management  information  system that links a substantial number of the Company's
centers with the Company's corporate headquarters in order to provide management
with the ability to collect and analyze center data,  control overhead expenses,
allow  detailed  budgeting at the center level,  and permit  effective  resource
management. All of the Company's centers are expected to be on-line by May 2000.

Pursue Large Group and Managed Care  Contracts.  Although the Company intends to
continue to aggressively pursue  private-payor  business because it is presently
more pervasive and profitable than managed care business,  the Company  believes
that by  providing  comprehensive  geographic  coverage in a  particular  market
through its  Company-owned  centers and through its  licensees,  it will be well
positioned to offer services to group hearing care plans in that market. Managed
care arrangements typically shift some of the economic risk of providing patient
care  from the  person  who pays  for the  care to the  provider  of the care by
capping  fees,  requiring  reduced  fees,  or  paying  a  set  fee  per  patient
irrespective of the amount of care delivered. With respect to hearing care, such
limits could result in reduced  payments  for  services or  restrictions  on the
types of services  for which  reimbursement  is  available  or the  frequency of
replacements  or  upgrades  of  equipment.  At the present  time,  managed  care
penetration  of the hearing  care market is limited.  However,  if managed  care
begins to play a larger  role in  hearing  care,  the  Company  plans to develop
information  systems  to  improve  productivity,  manage  complex  reimbursement
methodologies,  measure patient satisfaction and outcomes of care, and integrate
information from multiple sources.

         Many third-party insurers impose restrictions in their health insurance
policies on the  frequency  with which  hearing  instruments  may be upgraded or
replaced on a reimbursable  basis.  Such  restrictions have a negative impact on
hearing  instrument  sales volume.  There can be no guarantee that such insurers
will not implement  other policy  restrictions in the future in order to further
minimize reimbursement for hearing care. Such restrictions could have a material
adverse effect on the Company's business,  financial  condition,  and results of
operations.

CENTER STAFFING AND FACILITIES

         Typically,  each Company-owned  hearing center is staffed with at least
one audiologist  and one patient care  coordinator,  who handles  scheduling and
clerical  functions.  Where volume  warrants,  a center may also be staffed with
additional  audiologists,   hearing  instrument  dispensers,  and  patient  care
coordinators.  An  audiologist  employed  by the  Company has a masters or Ph.D.
degree in audiology.  The  audiologist is licensed by the  appropriate  state or
province  to  dispense  hearing  instruments  and is a  member  of the  American
Speech-Language   Hearing   Association   or   the   Canadian   Association   of
Speech/Language Pathologists and Audiologists.

                                      -6-
<PAGE>

         Each of the  Company's  hearing  centers  operates in leased space that
ranges in size from 800 to 3,000 square feet depending on patient volume and the
extent of services  provided by the center.  Centers  generally have a reception
seating area, a reception work and filing area, an office for the audiologist or
hearing  instrument  dispenser,  a laboratory for hearing instrument repairs and
modifications,  a  technology  demonstration  room  and an  evaluation  room.  A
properly equipped office offering only hearing rehabilitation  services requires
equipment  that costs  $50,000 to $75,000.  The cost of  equipment  for a center
offering  advanced  audio-diagnostic  services  is much  greater and ranges from
$225,000 to $250,000.

PRODUCTS AND SUPPLIERS

         The hearing  instrument  manufacturing  industry is highly  competitive
with   approximately  40  manufacturers   serving  the  worldwide  market.   Few
manufacturers offer significant product  differentiation.  The Company currently
purchases  a large  percentage  of its  hearing  instruments  from  six  primary
manufacturers based upon criteria that include quality,  price, and service. The
Company recently began offering a line of private-label hearing instruments that
is being marketed as the Sonus Digital  Hearing  System.  In addition to hearing
instruments,  the  Company's  centers  also offer a limited  selection  of other
assistive listening devices and hearing instrument accessories.

MARKETING

         The  Company's  marketing  program is designed to help its hearing care
centers retain existing  patients and expand the services they receive,  attract
new patients, and develop contracts to serve large groups of patients.

         The Company believes that patient  satisfaction is the key to retaining
and  expanding  services to existing  patients.  The Company also  believes that
delivering  comfortable,  high quality  hearing care at times and locations that
are convenient for the patient will motivate patients to return to the Company's
centers for their future  hearing care needs.  Educating  patients about hearing
health,  prescribing only necessary  hearing enhancing  products,  ensuring that
each  patient  leaves  a center  with a  future  visit  already  scheduled,  and
maintaining  consistent  patient  follow-up  and support are key elements of the
Company's plan to build patient loyalty and patronage.

         After a patient has obtained a hearing instrument, ongoing revenues are
generated from battery purchases and routine maintenance of the instruments. The
Company  believes that repeat  revenues are  attributable  to the length of time
that a  center  has  been  established  and  the  effectiveness  of its  patient
retention programs.

         The Company  believes that the same aspects of the  Company's  approach
that earn the loyalty of current  patients will also generate new patients.  The
Company's  new  patient  marketing  programs  are  designed  to help the Company
generate  referrals  from  physicians  and  existing  patients  and increase the
Company's  visibility  in the  community.  The  Company  seeks  to  foster  such
visibility  by  developing  marketing  materials  and  information  sources that
communicate the Company's  philosophy of high quality  patient-oriented  hearing
care.

         The Company's large group marketing  approach is designed to enable the
Company to develop contacts with self-insured employers and with health plans in
the  metropolitan  areas it serves and  emphasizes the  convenience,  quality of
care, and wide range of services offered by the Company.  The economies of scale
available to the Company may also allow health plans and self-insured  employers
served by the  Company to reduce  administrative  burdens  they might  otherwise
face. The Company  believes that it is well  positioned to respond to challenges
presented by the growth of managed care arrangements as they arise.

                                      -7-
<PAGE>

COMPETITION

         The hearing  care  industry  in the United  States and Canada is highly
fragmented  and intensely  competitive.  Many of the Company's  competitors  are
small  retailers  that  focus  primarily  on the  sale of  hearing  instruments.
However,  the Company also competes with other  networks of hearing care centers
and with large  distributors  of hearing  instruments  such as Dahlberg,  Inc, a
hearing instrument manufacturer that distributes its products through a national
network of over 1,000 franchised and  company-owned  stores  (Miracle-Ear),  and
Beltone  Electronics Corp., a hearing  instrument  manufacturer that distributes
its products  primarily  through its  nationwide  network of  approximately  600
franchised  dealers.  These competitors are in many cases better known and owned
by companies having far greater  financial and other resources than the Company.
There can be no assurance that one or more of these competitors will not seek to
compete  directly in the markets  targeted by the Company,  nor can there be any
assurance that the largely fragmented hearing care market cannot be successfully
consolidated by other companies or through the  establishment of  co-operatives,
alliances, confederations or the like.

REGULATION

         The sale of hearing  instrument  devices is  regulated  at the  federal
level in the United  States by the United  States  Food and Drug  Administration
("FDA"),  which has been  granted  broad  authority to regulate the hearing care
industry. Under federal law, hearing instruments may only be sold to individuals
who have first obtained a medical evaluation from a licensed physician, although
a fully  informed  adult may waive a medical  evaluation  in certain  instances.
Regulations  promulgated  by the FDA also presently  require that  dispensers of
hearing  instruments  provide  customers  with certain  warning  statements  and
notices in connection  with the sale of hearing  instruments and that such sales
be made in compliance with certain labeling requirements.

         Most  states in the United  States and many  provinces  in Canada  have
established  formal  licensing  procedures  that  require the  certification  of
audiologists   and/or  HISs.   Although  the  extent  of  regulation  varies  by
jurisdiction, almost all states and provinces engage in some degree of oversight
of the  industry.  The Company  operates its hearing  care  centers  through its
wholly owned  subsidiaries,  Sonus-USA,  Sonus-Texas,  and  Sonus-Canada.  These
subsidiary  corporations  employ  licensed  audiologists  and HISs who offer and
perform  audiology  services and dispense  hearing  instruments on behalf of the
Company.

         In certain states in the United States,  business  corporations such as
Sonus-USA  may not be  authorized  to employ  audiologists  and offer  audiology
services.  For example,  in California,  where the Company  operates a number of
centers,   although  the  performance  of  audiology  services  by  professional
corporations owned solely by licensed audiologists is expressly authorized under
California  law, it is unclear  whether general  business  corporations  such as
Sonus-USA  may  employ  licensed  audiologists  to perform  audiology  services.
However,  the  California  Department  of  Consumer  Affairs  has  indicated  by
memorandum that speech-language pathologists, which are regulated under statutes
and  regulations  similar to those  governing  audiologists,  may  practice in a
general business corporation and that a general business corporation may provide
speech-language  pathology  services  through licensed speech  pathologists.  In
Illinois,  where the  Company  also  operates  a number of  centers,  it is also
unclear whether general business  corporations may employ licensed  audiologists
to  perform   audiology   services.   Under  Illinois  law,  only   professional
corporations  and  individuals  are  authorized  to obtain  licenses to practice
audiology.

                                      -8-
<PAGE>

         The laws and  regulations  governing  the  practice  of  audiology  are
enforced by regulatory agencies with broad discretion. If the Company were found
to be in  violation  of such laws and  regulations  in one or more  states,  the
consequences  could  include  the  imposition  of fines and  penalties  upon the
Company and its  audiologists as well as the issuance of orders  prohibiting the
Company from operating its centers under its present  structure.  In that event,
among the solutions the Company might consider would be the restructuring of all
or a portion  of its  operations  in a manner  similar  to that used by  certain
medical  and  dental  center  networks.  Under  such a  structure,  professional
corporations  owned by licensed  audiologists would contract with the Company to
perform   professional   services  and  the  Company  would  contract  with  the
professional corporations to provide management services.

         No assurance can be given that the Company's  activities  will be found
to be in compliance with laws and regulations  governing the corporate  practice
of audiology or, if its activities are not in compliance,  that the  operational
structure of the Company can be modified to permit compliance.  In addition,  no
assurance  can be given  that other  states or  provinces  in which the  Company
presently  operates will not enact  prohibitions  on the  corporate  practice of
audiology or that the  regulatory  framework of certain  jurisdictions  will not
limit the  ability  of the  Company  to expand  into such  jurisdictions  if the
Company  is unable to  modify  its  operational  structure  to comply  with such
prohibitions or to conform with such regulatory  framework.  Additional laws and
regulations  may be adopted in the future at the  federal,  state,  or  province
level  that  could have a material  adverse  effect on the  business,  financial
condition, and results of operations of the Company.

         A portion of the revenues of the hearing  care centers  operated by the
Company  comes from  Medicare and Medicaid  programs.  Federal law prohibits the
offer,  payment,  solicitation  or receipt of any form of remuneration in return
for, or in order to induce,  (i) the referral of a Medicare or Medicaid patient,
(ii) the  furnishing  or  arranging  for the  furnishing  of  items or  services
reimbursable under Medicare or Medicaid programs or (iii) the purchase, lease or
order  of  any  item  or  service   reimbursable  under  Medicare  or  Medicaid.
Noncompliance with the federal anti-kickback legislation can result in exclusion
from Medicare and Medicaid programs and civil and criminal penalties.

         Because of its franchise  licensing  program,  The Sonus  Network,  the
Company is subject to state and federal regulation of franchising.  Much of this
regulation  involves providing detailed  disclosure to a prospective  franchisee
and periodic registration by the franchisor with state administrative  agencies.
Additionally, some states have enacted, and others have considered,  legislation
that governs the  termination or non-renewal of a franchise  agreement and other
aspects of the  franchise  relationship.  The United  States  Congress  has also
considered legislation of this nature. The Company believes that it has complied
with all applicable franchise laws and regulations.

PRODUCT AND PROFESSIONAL LIABILITY; PRODUCT RETURNS

         In the ordinary  course of its business,  the Company may be subject to
product and  professional  liability  claims alleging the failure of, or adverse
effects  claimed to have been caused by,  products sold or services  provided by
the Company. The Company maintains insurance against such claims at a level that
the Company believes is adequate.  A customer may return a hearing instrument to
the Company and obtain a full refund up to 60 days (75 days for certain  models)
after  the  date of  purchase.  In  general,  the  Company  can  return  hearing
instruments  returned  by  customers  within  the return  period  allowed by the
Company to the manufacturer for a full refund.  The Company maintains an accrual
based on estimated  returns to account for returns that cannot be passed through
to the manufacturers and must be absorbed by the Company.

                                      -9-
<PAGE>

EMPLOYEES

         At October 1, 1999,  the Company  had 269  full-time  and 89  part-time
employees,  of which  100 are  audiologists  or  hearing  instrument  dispensers
practicing  full time and 24 are  practicing  part-time.  None of the  Company's
employees are  represented  by a labor union.  Management  believes it maintains
good relationships with its employees.

SERVICE AND ENFORCEMENT OF LEGAL PROCESS

         The Company is incorporated under the laws of Yukon Territory,  Canada.
Two of the  Company's  directors are residents of Canada and all or a portion of
the assets of such persons and of the Company are located  outside of the United
States. As a result, it may be difficult for holders of the Company's securities
to effect  service  within the United  States upon those  directors  who are not
residents  of the  United  States,  or to  realize  in the  United  States  upon
judgments of courts of the United  States  predicated  upon the civil  liability
provisions  of the United  States  federal  securities  laws to the extent  such
judgments  exceed such person's  United States assets.  There is doubt as to the
enforceability in Canada against the Company or against any of its directors who
are not residents of the United  States,  in original  actions or in actions for
enforcement  of judgments of United States  courts,  of  liabilities  predicated
solely upon United States  federal  securities  laws.  The  Company's  agent for
service of process in the United States is MN Service Corp.  (Oregon),  111 S.W.
Fifth Avenue, Suite 3500, Portland, Oregon 97204, telephone (503) 224-5858.

ITEM 2. DESCRIPTION OF PROPERTY

         The Company's  executive  offices are located in  approximately  12,400
square feet of leased  office  space in  downtown  Portland,  Oregon.  The lease
expires on  September  30, 2004 and provides for an annual base rent of $235,200
until October 1, 2003, when the annual base rent increases to $273,060.  Each of
the Company's  hearing centers operates in leased space that ranges in size from
800 to 3,000 square feet.  Approximately  65 percent of the locations are leased
for one to eight-year  terms pursuant to generally  non-cancelable  leases (with
renewal options in some cases) with the remaining locations leased on a month-to
month basis. The aggregate committed rental expense as of July 31, 1999, for the
subsequent five-year period is approximately $5.7 million.

ITEM 3. LEGAL PROCEEDINGS

         None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         Not applicable.


                                      -10-
<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS


PRICE RANGE OF COMMON SHARES

         The  Company's  common  shares  ("Common  Shares")  were  traded on The
Alberta Stock Exchange until February 10, 1998, at which time they began trading
on the American Stock Exchange. The following table sets forth the reported high
and low sales prices in Canadian and United States dollars for the Common Shares
for the periods indicated:

<TABLE>
FISCAL YEAR                           PERIOD                           HIGH       LOW        HIGH        LOW
                                                                        CANADIAN $(2)       UNITED STATES $(1)
<S>                                                                     <C>       <C>          <C>       <C>
1998................................. First Quarter                     10.75     7.75         7.75      5.60
                                      Second Quarter                    13.00     8.50         9.05      6.00
                                      Third Quarter                     13.64    10.84         9.50      7.63
                                      Fourth Quarter                    14.36     9.15         9.50      6.25

1999................................. First Quarter                    14.966    6.945        9.875     4.500
                                      Second Quarter                    8.237    4.899        5.375     3.188
                                      Third Quarter                     8.588    6.165        5.750     4.125
                                      Fourth Quarter                    7.180    5.894        4.938     4.000
</TABLE>


-----------

(1)      For reported  prices prior to February 10, 1998, the high and low sales
         prices were converted to United States dollars as of the date of sale.
(2)      For  reported  prices after  February 10, 1998,  the high and low sales
         prices were converted to Canadian dollars as of the date of sale.

HOLDERS AND DIVIDENDS

         As of  October  1,  1999,  there  were 56  holders  of record of Common
Shares.

         For as long as Warburg,  Pincus Ventures,  L.P.,  beneficially  owns at
least  666,666  Series A  Convertible  Preferred  Shares or Series B Convertible
Preferred  Shares or the Common  Shares  into which  such  preferred  shares are
convertible,  the  Company  may not,  without  such  holder's  consent,  pay any
dividend or distribution on its Common Shares.

CANADIAN FEDERAL INCOME TAX CONSIDERATIONS

         Following is a summary of the  principal  Canadian  federal  income tax
considerations  under  the  Income  Tax Act  (Canada)  (the  "Tax  Act") and the
regulations  thereunder  generally  applicable to a holder of Common Shares who,
for purposes of the Tax Act, holds such shares as capital  property and deals at
arm's length with the Company. Generally, Common Shares will be considered to be
capital property to a holder provided the holder does not hold the Common Shares
in the course of carrying on a business of trading or dealing in securities  and
has not acquired them in one or more transactions  considered to be an adventure
in the nature of trade. Special rules apply to non-resident  insurers that carry
on an insurance business in Canada and elsewhere.

         This summary is based upon the provisions of the Tax Act in force as of
the date  hereof,  all  specific  proposals  to amend the Tax Act that have been
publicly announced prior to the date hereof (the "Proposed  Amendments") and the
Company's  understanding of the current published  administrative  and assessing
policies and practices of Revenue Canada, Customs, Excise and Taxation ("Revenue
Canada"). For the purposes of this summary, it has been assumed that the Tax Act
will be amended as proposed,  although no assurance can be given in this regard.
This summary is not exhaustive of all possible  federal income tax  consequences
and, except for the Proposed Amendments,  does not anticipate any changes in the
law, whether by legislative,  governmental or judicial  decision or action,  nor
does it take into account provincial, territorial or foreign tax considerations,
which may differ  significantly from those discussed herein. This summary is not
applicable to holders who are "specified financial institutions" for purposes of
the Tax Act, a holder that is a  "financial  institution"  as defined in the Tax
Act for  purposes  of the  mark-to-market  rules,  or to a holder of an interest
which would be a "tax shelter investment" as defined in the Tax Act.

                                      -11-
<PAGE>

         This summary is of a general nature only and is not intended to be, and
should not be  construed to be,  legal or tax advice to any  particular  holder.
Accordingly,  holders should consult their  independent  tax advisers for advice
with  respect  to the  income  tax  consequences  relevant  to their  particular
circumstances.

         The following  applies to holders of Common Shares who are not resident
in  Canada  for  purposes  of the Tax Act and who do not use or hold and are not
deemed to use or hold their Common Shares in, or in the course of, carrying on a
business in Canada.

Dispositions of Common Shares. A non-resident holder will, upon a disposition or
deemed disposition of Common Shares, not be subject to taxation in Canada on any
gain  realized  on the  disposition  unless  the shares  are  "taxable  Canadian
property"  for the  purposes of the Tax Act and no relief is  afforded  under an
applicable  tax  convention  between  Canada and the country of residence of the
holder.  Since the Common Shares are listed on a prescribed  stock  exchange for
the purposes of the Tax Act,  Common Shares held by a  non-resident  holder will
generally  not be "taxable  Canadian  property"  unless,  at any time during the
five-year period immediately preceding the disposition, the non-resident holder,
persons with whom the non-resident  holder did not deal at arm's length,  or the
non-resident  holder  together  with  such  persons,  owned or had the  right to
acquire  25% or more of the  issued  shares of any class of the  capital  of the
Company.  Any  interest  in shares  or  options  in  respect  of shares  will be
considered to be the  equivalent of ownership of such shares for purposes of the
definition of taxable Canadian property.

         Non-residents  whose shares constitute "taxable Canadian property" will
be subject to  taxation in respect of a  disposition  or deemed  disposition  of
Common Shares on the same basis as Canadian  residents unless otherwise exempted
by an applicable tax  convention  between Canada and the country of residence of
the holder.

         Pursuant to the Canada-United  States Income Tax Convention,  1980 (the
"Convention"),  shareholders  of the Company  that are  residents  in the United
States for the purposes of the  Convention  and whose shares might  otherwise be
"taxable  Canadian  property" may be exempt from Canadian taxation in respect of
any gains on the disposition of the Common Shares,  provided the principal value
of the Company is not derived from real  property  located in Canada at the time
of disposition.

         Non-resident  holders  who might hold their  Common  Shares as "taxable
Canadian  property"  should  consult  their own tax advisers with respect to the
income tax consequences of a disposition of their Common Shares.

         Non-resident  holders  whose  shares are  repurchased  by the  Company,
except in respect of certain  purchases  made by the Company in the open market,
will be deemed to have  received  the payment of a dividend by the Company in an
amount equal to the excess paid over the paid-up capital of the Common Shares so
purchased.  Such deemed dividend will be excluded from the holder's  proceeds of
disposition  of the Common Shares for the purposes of computing any capital gain
or loss but will be  subject to  Canadian  non-resident  withholding  tax in the
manner described below under "Dividends."

Dividends.  Dividends received by a non-resident holder of Common Shares will be
subject to  Canadian  withholding  tax at the rate of 25% of the amount  thereof
unless the rate is reduced under the  provisions of an applicable tax convention
between Canada and the country of residence of the holder. The provisions of the
Convention generally reduce the rate to 15%. A further reduction to 5% under the
Convention  will be available if the  recipient is a company which owns at least
10% of the voting shares of the Company.

                                      -12-
<PAGE>

INVESTMENT CANADA ACT

         The  Investment  Canada Act (the "ICA")  prohibits the  acquisition  of
control of a Canadian  business by non-Canadians  without review and approval of
the Investment  Review Division of Industry Canada,  the agency that administers
the ICA,  unless such  acquisition is exempt from review under the provisions of
the ICA. The Investment  Review  Division of Industry Canada must be notified of
such exempt  acquisitions.  The ICA covers  acquisitions of control of corporate
enterprises,  whether by purchase of assets,  shares or "voting interests" of an
entity that  controls,  directly or  indirectly,  another  entity  carrying on a
Canadian business.

         Apart  from the ICA,  there  are no other  limitations  on the right of
nonresident or foreign owners to hold or vote securities imposed by Canadian law
or the Company's  Articles.  There are no other decrees or regulations in Canada
that  restrict  the  export or import of  capital,  including  foreign  exchange
controls, or that affect the remittance of dividends, interest or other payments
to  nonresident  holders of the  Company's  Common  Shares,  except as discussed
elsewhere herein.

SALES OF UNREGISTERED SECURITIES DURING FISCAL 1999

         There were no securities  of the Company  issued  without  registration
under the  Securities  Act of 1933 during the fiscal  year ended July 31,  1999,
except as previously  reported in the Company's quarterly reports on Form 10-QSB
filed during the fiscal year.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION



OVERVIEW

         During  the  fiscal  year ended July 31,  1999,  the  Company  achieved
significant  growth in revenues,  primarily due to the acquisition and operation
of additional hearing care centers. For the fiscal year ended July 31, 1999, the
Company  generated  total  revenues  of $33.8  million,  an increase of 51% over
fiscal 1998. For the fiscal year ended July 31, 1999, the Company incurred a net
loss of $4.9 million, compared to a net loss of $4.6 million for the 1998 fiscal
year. As of July 31, 1999,  the Company's  accumulated deficit was $11.6 million
and its total shareholders' equity was $18.8 million.

ACQUISITIONS

         During the fiscal year ended July 31,  1999,  the  Company  acquired 31
hearing care centers in 17  transactions.  The aggregate  purchase price for the
acquisitions  consisted of cash payments of $1,704,000,  promissory notes issued
by the Company of $1,749,000 generally payable over three years, and $900,000 in
assumed  liabilities.  As a result of the  acquisitions,  the  Company  recorded
approximately $95,000 in accounts receivable,  $90,000 in inventory, $457,000 in
property and  equipment,  $20,000 in other assets,  and  $3,700,000 in goodwill,
which included costs related to acquisitions. The Company also recorded $299,000
for covenants  not to compete,  of which $79,000 was paid in cash at the time of
closing, with the balance payable over three years.

         The 31 hearing  care  businesses  acquired  by the  Company  during the
fiscal year ended July 31, 1999,  have  combined  historical  revenues for their
immediately  preceding fiscal years of approximately  $8.6 million.  The Company
expects these centers to contribute to the Company's future revenues  consistent
with their  historical  revenues,  as well as to have a positive  effect on cash
flows and liquidity.

                                      -13-
<PAGE>

         As of July 31, 1999,  the Company had recorded  $19,774,000 in goodwill
and $2,226,000 in covenants not to compete.  The amortization of the unamortized
balance totaling  $19,768,000 at July 31, 1999, which represented  approximately
63% of the Company's  total assets,  will result in an annual non-cash charge to
earnings of  approximately  $948,000 in each of the next 20 years. If all of the
employees  with  covenants  not to compete  referred  to above were to leave the
Company, an additional non-cash charge to earnings of approximately  $677,000 in
each of the current and next two fiscal years would also be incurred.

RESULTS OF OPERATIONS

Year Ended July 31, 1999, Compared to Year Ended July 31, 1998

         Revenues.  Total revenues for the fiscal year ended July 31, 1999, were
$33,759,000,  representing a 51% increase over revenues of  $22,368,000  for the
prior fiscal year. The increase was primarily due to the 31 businesses  acquired
during fiscal 1999.  Revenue was also favorably impacted by an increase of 5% in
comparable center revenue in fiscal 1999.  Comparable  centers are those centers
that have been open at least 24 months.  Product sales revenues were $29,044,000
for the  1999  fiscal  year,  up 55%  from  the  $18,792,000  for  fiscal  1998.
Audiological  service  revenues  increased  from  $3,311,000,  or 15%  of  total
revenues, in fiscal 1998, to $3,392,000,  or 10% of total revenues, for the 1999
fiscal year.

         Gross Profit on Product Sales. Product gross profit for the fiscal year
ended July 31,  1999,  was  $18,278,000  compared to  $11,080,000  for the prior
fiscal  year.  Gross profit  percentage  on product  sales  increased to 63% for
fiscal 1999 from 59% for fiscal 1998. The increase in gross profit percentage on
product sales was primarily  attributable to increased buying power with hearing
instrument  manufacturers,  less  dependence  on sales  discounts,  better price
management and a new tiered pricing strategy based on levels of technology.

         Clinical  Expenses.  As a  percentage  of revenues,  clinical  expenses
decreased  to 53% for the fiscal year ended July 31,  1999,  compared to 55% for
the fiscal year ended July 31,  1998.  The  percentage  decrease  was due to the
Company's  ability  to cut  costs,  streamline  its  operations,  and  eliminate
inefficient and  duplicative  processes.  Clinical  expenses for the fiscal year
ended July 31,  1999,  were  $17,795,000,  representing  an increase of 45% over
clinical  expenses of $12,297,000  for the prior fiscal year.  This increase was
primarily due to clinical expenses associated with the 31 additional  businesses
that were  acquired by the Company  during the fiscal year ended July 31,  1999.
Clinical  expenses  include  all  personnel,   marketing,  occupancy  and  other
operating expenses at the center level.

         General and  Administrative  Expenses.  As a  percentage  of  revenues,
general and  administrative  expenses decreased to 22% for the fiscal year ended
July 31,  1999,  versus 26% for the same period in the prior  fiscal  year.  The
decrease in general and administrative  expenses as a percentage of revenues was
due to  growth  in the  Company's  revenue  base as a  result  of its  strategic
acquisition program and enhanced marketing efforts, as well as an administrative
restructuring  and  cost-cutting  program  implemented  by the Company in fiscal
1999.  General and  administrative  expenses in dollar terms  increased 29% from
$5,896,000 for the fiscal year ended July 31, 1998, to $7,583,000 for the fiscal
year ended July 31, 1999, due to planned  increases in corporate staff and other
corporate expenses related to the operation of a larger organization.

                                      -14-
<PAGE>

         Depreciation  and Amortization  Expense.  Depreciation and amortization
expense for the fiscal year ended July 31, 1999, was $2,450,000,  an increase of
80% over the depreciation  and amortization  expense of $1,361,000 for the prior
fiscal  year.  The  increase  resulted  from the  depreciation  of property  and
equipment and  amortization of goodwill and covenants not to compete  associated
with the 31 additional businesses acquired by the Company during the fiscal year
ended July 31, 1999, as well as from  depreciation and  amortization  associated
with businesses acquired in the second half of fiscal 1998.

         Interest Income and Expense.  Interest income for the fiscal year ended
July 31, 1999,  decreased to $261,000  from  $452,000 for the prior fiscal year.
The decrease was due to lower balances of cash and short-term  investments  held
by the Company.  Interest  expense for the fiscal year ended July 31, 1999,  was
$300,000  compared to $149,000 for the fiscal year ended July 31,  1998,  due to
higher balances of long-term debt incurred in connection with acquisitions.

         Net Loss.  For the fiscal year ended July 31,  1999,  the Company had a
net loss of $4,884,000  compared to a net loss of $4,594,000 for the fiscal year
ended July 31, 1998. The Company's loss from operations before  depreciation and
amortization for fiscal 1999 was $2,385,000 compared to an operating loss before
depreciation and amortization of $3,537,000 for fiscal 1998.

Year Ended July 31, 1998, Compared to Year Ended July 31, 1997

         Revenues.  Total revenues for the fiscal year ended July 31, 1998, were
$22,368,000,  representing a 66% increase over revenues of  $13,462,000  for the
prior fiscal year.  Of this  increase,  $3,760,000  was  attributable  to the 34
businesses  acquired during fiscal 1998. Product sales revenues were $18,792,000
for the  1998  fiscal  year,  up 64%  from  the  $11,472,000  for  fiscal  1997.
Audiological  service  revenues  increased  from  $1,943,000,  or 14%  of  total
revenues in fiscal 1997, to $3,311,000,  or 15% of total revenues,  for the 1998
fiscal year.

         Gross Profit on Product Sales. Product gross profit for the fiscal year
ended July 31, 1998, was $11,080,000 compared to $6,462,000 for the prior fiscal
year.  Gross profit  percentage  on product sales was 59% for fiscal 1998 versus
56% for fiscal 1997.  The increase in gross profit  percentage  on product sales
was primarily  attributable to higher volume  discounts,  improved product sales
management, and an increase in the percentage of total revenues derived from the
Company's  operations in the United States,  where gross profit  percentages are
higher than those for the Company's operations in Canada.

         Clinical Expenses. Clinical expenses for the fiscal year ended July 31,
1998, were $12,297,000,  representing an increase of 105% over clinical expenses
of  $5,985,000  for the prior fiscal year.  This  increase was  primarily due to
clinical expenses  associated with the 34 additional  businesses that were owned
by the Company  during the fiscal year ended July 31, 1998, but not owned during
the prior fiscal year,  and increased  marketing  expenses  designed to increase
brand awareness of the Company within the hearing health industry.

         General  and  Administrative   Expenses.   General  and  administrative
expenses  increased 73% from $3,410,000 for the fiscal year ended July 31, 1997,
to $5,896,000 for the fiscal year ended July 31, 1998, due to planned  increases
in corporate  staff and other corporate  expenses  related to the operation of a
larger  organization,  as well as one-time  expenses incurred in connection with
the implementation of the Company's franchise and branding programs,  consulting
and professional fees, and inventory revaluations.  As a percentage of revenues,
general and  administrative  expenses rose to 26% for the fiscal year ended July
31, 1998, versus 25% for the prior fiscal year.

                                      -15-
<PAGE>

         Depreciation  and Amortization  Expense.  Depreciation and amortization
expense for the fiscal year ended July 31, 1998, was $1,361,000,  an increase of
72% over the  depreciation  and  amortization  expense of $790,000 for the prior
fiscal  year.  The  increase  resulted  from the  depreciation  of property  and
equipment and  amortization of goodwill and covenants not to compete  associated
with the 34 additional businesses operated by the Company during the fiscal year
ended July 31, 1998.

         Interest Income and Expense.  Interest income for the fiscal year ended
July 31, 1998, increased to $452,000 from $76,000 for the prior fiscal year. The
increase was due to higher balances of cash and short-term  investments  held by
the Company as a result of a sale of preferred  shares in December  1997 and the
exercise  of  warrants to purchase  Common  Shares in  February  1998.  Interest
expense  for the fiscal  year ended July 31,  1998,  was  $149,000  compared  to
$47,000  for the fiscal  year ended July 31,  1997,  due to higher  balances  of
long-term debt incurred in connection with acquisitions.

         Net Loss.  For the fiscal year ended July 31,  1998,  the Company had a
net loss of $4,594,000  compared to a net loss of $1,701,000 for the fiscal year
ended July 31, 1997. The Company's loss from operations before  depreciation and
amortization  for fiscal 1998 was $3,537,000  compared to a loss of $943,000 for
fiscal 1997.

LIQUIDITY AND CASH RESERVES

         For the fiscal  year ended July 31,  1999,  net cash used in  operating
activities  was  $2,281,000  compared to $2,203,000 for fiscal 1998 and $606,000
for fiscal  1997.  Net cash  provided by  investing  activities  was $878,000 in
fiscal 1999 compared to net cash used in investing  activities of $11,786,000 in
fiscal  1998  and  $4,021,000  in  fiscal  1997.  The  Company  sold  short-term
investments to fund  acquisitions and provide working capital during fiscal 1999
in contrast to its purchase of short-term  investments in fiscal 1998 and fiscal
1997  following the sale of preferred  shares in the second quarter and the sale
of common  shares and  warrants in fiscal 1997.  Net cash  provided by financing
activities was $5,742,000 in fiscal 1997 and $15,817,000 in fiscal 1998 compared
to net cash used in financing  activities of $821,000 in fiscal 1999. The change
was  primarily  the result of funds  provided  by the sale of common  shares and
warrants in fiscal 1997 and the sale of preferred shares in fiscal 1998.

         On October 1, 1999, the Company issued  2,500,000  Series B Convertible
Preferred  Shares in a private  placement for  $10,000,000 in cash. As a result,
the Company believes that its cash and short-term  investments,  along with cash
generated from operations,  will provide it with sufficient  capital to fund its
operations over the next 12 months.  Thereafter,  the Company  anticipates  that
additional  funding will be needed to fund the  Company's  strategy of acquiring
additional  hearing care centers.  These funding  requirements may result in the
Company  incurring  long-term and short-term  indebtedness  and in the public or
private  issuance,  from time to time, of additional  equity or debt securities.
Any such  issuance of equity may be dilutive  to current  shareholders  and debt
financing may impose significant restrictive covenants on the Company. There can
be no assurance that any such financing will be available to the Company or will
be available on terms acceptable to the Company.

YEAR 2000

         The "Year 2000  problem"  refers to the  possibility  that computer and
other systems could fail or not work properly as a result of these systems using
only the last two  digits  of a year to refer to that year and  therefore  being
unable to properly  recognize a year that begins with "20" instead of "19".  The
Company  has  undertaken  a review  of the  potential  effects  of the Year 2000
problem on its business on a system by system basis.

                                      -16-
<PAGE>

         With respect to its information  technology ("IT") systems, the Company
believes  that the  computer  hardware  and  system  software  of its IBM AS/400
computer,  on which its patient management system and accounting system operate,
are  Year  2000  compliant.  Unrelated  to Year  2000  issues,  the  Company  is
continuing its development of a new patient  management system.  Initially,  the
Company's  hearing care centers and its  subsidiary  Hear PO Corp.  will use the
software.  However,  in the future the Company  may license the  software to its
Sonus Network franchise licensees and others. The development contractor for the
software has represented  that it will meet Year 2000 standards.  Implementation
of the new software is expected to begin in November 1999. The Company installed
a new release of its accounting and financial  reporting software in March 1999,
which the vendor represents is Year 2000 compliant. The Company has surveyed all
of its servers, personal computers, and network hardware to determine compliance
with Year 2000  standards and is in the process of replacing all equipment  that
was found to be deficient.  The Company  estimates that the  replacement of this
equipment  will be completed  before  December  31,  1999,  and that the cost of
replacement will be less than $50,000.

         The  Company  has  reviewed  its  non-IT   systems   (primarily   voice
communications)  for Year 2000  compliance  and has replaced  those systems that
were found to be non-compliant. The Company's cost to replace the non-IT systems
that were non-compliant with Year 2000 standards was less than $50,000.

         The  Company  also faces the risk that  vendors  from which the Company
purchases goods and services, such as hearing instrument manufacturers,  utility
providers, the banks that maintain the Company's depository accounts and process
its credit card  transactions,  and the Company's  payroll  processor,  may have
systems  that  are not  Year  2000  compliant.  Significant  disruptions  in the
operations of its vendors may have a material adverse effect on the Company. The
Company is  continuing to monitor the progress of its major vendors in achieving
Year 2000  compliance.  However,  the Company  presently does not anticipate the
occurrence of major interruptions in its business due to Year 2000 issues.

         The Company has not established a contingency plan to address potential
Year 2000  noncompliance  with respect to the Company's  systems or those of its
major vendors and is  considering  the extent to which such a plan is necessary.
Due to the  Company's  dependence  on  systems  outside  its  control,  such  as
telecommunications,   transportation,  and  power  supplies,  there  can  be  no
assurance that the Company will not face unexpected problems associated with the
Year 2000  problem  that may  affect its  operations,  business,  and  financial
condition.

ACCOUNTING PRONOUNCEMENTS

         In June 1998,  Statement of  Financial  Accounting  Standards  No. 133,
"Accounting for Derivative  Instruments and Hedging Activities" ("SFAS No. 133")
was issued. SFAS No. 133 standardizes the accounting for derivative  instruments
by requiring  that an entity  recognize  those items as assets or liabilities in
the  financial  statements  and  measure  them at fair  value.  SFAS No.  133 is
effective for all fiscal  quarters of all fiscal years  beginning after June 15,
2000. As the Company does not hold any derivative  instruments,  SFAS No. 133 is
not expected to have an impact on the Company's financial statements.

         In April 1998, the American  Institute of Certified Public  Accountants
issued  Statement  of  Position  98-5,  "Reporting  on  the  Costs  of  Start-Up
Activities"  ("SOP 98-5") which  requires that costs of start-up  activities and
organizational  costs  be  expensed  as  incurred.  SOP  98-5 is  effective  for
financial  statements  for fiscal  years  beginning  after  December  15,  1998.
Although the Company has not fully determined its complete  impact,  the Company
does  not  foresee  any  material  change  due to  adoption  of SOP  98-5 on its
financial statements.

                                      -17-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.

                         REPORT OF INDEPENDENT AUDITORS




TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
SONUS CORP.:


We have audited the accompanying  consolidated balance sheets of Sonus Corp. and
subsidiaries  as of  July  31,  1999  and  1998,  and the  related  consolidated
statements of operations,  shareholders'  equity, and cash flows for each of the
years in the three-year period ended July 31, 1999. These consolidated financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the consolidated  financial position of Sonus
Corp.  and  subsidiaries  as of July 31,  1999 and  1998,  and the  consolidated
results  of their  operations  and their cash flows for each of the years in the
three-year  period ended July 31, 1999 in  conformity  with  generally  accepted
accounting principles.


                                KPMG LLP



Portland, Oregon
October 25, 1999


                                      -18-
<PAGE>

                                   SONUS CORP.
                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
                                                                                    July 31,
                                                                           ----------------------------
                                                                             1999                1998
                                                                           --------            --------

                                     ASSETS

Current assets:
<S>                                                                        <C>                 <C>
     Cash and cash equivalents                                             $    498            $  2,720
     Short-term investments, available for sale                                 ---               6,408
     Accounts receivable, net of allowance for doubtful
       accounts of $907 and $684, respectively                                3,666               3,339
     Other receivables                                                          346                 515
     Inventory                                                                  499                 967
     Prepaid expenses                                                           340                 270
                                                                           --------            --------
              Total current assets                                            5,349              14,219

Property and equipment, net                                                   6,208               3,607
Other assets                                                                     60                 151
Goodwill and covenants not to compete, net                                   19,768              16,152
                                                                           --------            ---------
                                                                           $ 31,385            $ 34,129
                                                                           ========            =========

                      LIABILITIES AND SHAREHOLDERS' EQUITY


Current liabilities:
     Bank loan                                                             $    ---            $     46
     Note payable-related party                                                 500                 ---
     Accounts payable                                                         3,727               2,879
     Accrued payroll                                                          1,223               1,110
     Other accrued liabilities                                                1,317               2,595
     Convertible notes payable                                                  931                 ---
     Capital lease obligation, current portion                                  129                 120
     Long-term debt, current portion                                          2,150               1,160
                                                                           --------            --------
              Total current liabilities                                       9,977               7,910

Convertible notes payable                                                       ---               1,170
Capital lease obligation, less current portion                                   96                 223
Long-term debt, less current portion                                          2,497               1,733
                                                                           --------            --------
              Total liabilities                                              12,570              11,036
                                                                           --------            --------

Shareholders' equity:
     Series A convertible preferred stock, no par
          value per share, 13,333,333 shares authorized,
          issued, and outstanding (liquidation preference of $18,000)        15,701              15,701
     Common stock, no par value per share, unlimited
          number of shares authorized, 6,109,026 and 6,079,908
          shares, respectively, issued and outstanding                       14,976              14,615
     Notes receivable from shareholders                                         (93)               (283)
     Accumulated deficit                                                    (11,595)             (6,711)
     Accumulated other comprehensive loss                                      (174)               (229)
                                                                           --------            --------
              Total shareholders' equity                                     18,815              23,093
                                                                           --------            --------
                                                                           $ 31,385            $ 34,129
                                                                           ========            ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      -19-
<PAGE>
                                   SONUS CORP.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)


<TABLE>
                                                                       Years ended July 31,
                                                           -----------------------------------------------
                                                               1999               1998              1997
                                                           ----------         ----------        ----------

<S>                                                        <C>                <C>               <C>
Revenues:
     Product                                               $   29,044         $   18,792        $   11,472
     Service                                                    3,392              3,311             1,943
     Other                                                      1,323                265                47
                                                           ----------         ----------        ----------
     Net revenues                                              33,759             22,368            13,462

Costs and expenses:
     Cost of products sold                                     10,766              7,712             5,010
     Clinical expenses                                         17,795             12,297             5,985
     General and administrative expenses                        7,583              5,896             3,410
     Depreciation and amortization                              2,450              1,361               790
                                                           ----------         ----------        ----------
     Total costs and expenses                                  38,594             27,266            15,195
                                                           ----------         ----------        ----------

Loss from operations                                           (4,835)            (4,898)           (1,733)


Other income (expense):
     Interest income                                              261                452                76
     Interest expense                                            (300)              (149)              (47)
     Other, net                                                   (10)                 1                 3
                                                           ----------         ----------        ----------
Net loss                                                   $   (4,884)        $   (4,594)       $   (1,701)
                                                           ==========         ==========        ==========

Net loss per common share:
     Basic and diluted                                     $    (0.80)        $    (0.89)       $    (0.42)

Weighted average common shares outstanding:
     Basic and diluted                                      6,090,379          5,160,399         4,009,876
</TABLE>


          See accompanying notes to consolidated financial statements.

                                      -20-
<PAGE>
                                  SONUS CORP.
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                       (IN THOUSANDS, EXCEPT SHARE DATA)


<TABLE>
                                                          Preferred stock              Common stock
                                                      ------------------------    ------------------------
                                                        Shares        Amount        Shares        Amount
                                                      ----------    ----------    ----------    ----------
<S>                                                   <C>           <C>            <C>          <C>
BALANCE AT JULY 31, 1996                                     ---           ---     3,565,549    $    1,925

  Net loss                                                   ---           ---           ---           ---
       Foreign currency translation adjustment               ---           ---           ---           ---
 Comprehensive loss                                          ---           ---           ---           ---

  Stock issued in connection
     with receipt of tax credit                              ---           ---        22,560            38
  Proceeds from exercise of stock options                    ---           ---       155,000           316
  Stock issued in connection with acquisitions               ---           ---       587,876         3,291
  Stock issued under private placement
     (net proceeds)                                          ---           ---     1,093,482         5,529
  Proceeds from exercise of warrants                         ---           ---         7,150            32
  Repurchase of common stock                                 ---           ---        (3,960)          (33)
                                                      ----------    ----------    ----------    ----------
BALANCE AT JULY 31, 1997                                     ---           ---     5,427,657    $   11,098

  Net loss                                                   ---           ---           ---           ---
       Foreign currency translation adjustment               ---           ---           ---           ---
 Comprehensive loss                                          ---           ---           ---           ---

  Stock issued upon conversion
      of convertible note                                    ---           ---        25,925           128
  Stock issued in connection with acquisition
      contingent upon satisfaction of
      certain conditions (Note 2)                            ---           ---        22,936           ---
  Repurchase of common stock                                 ---           ---        (3,000)          (25)
  Proceeds from exercise of stock options                    ---           ---        10,000             9
  Stock issued in connection with Series A
      convertible preferred stock, net of costs       13,333,333        15,701           ---           ---
  Proceeds from exercise of warrants                         ---           ---       373,998         1,957
  Proceeds from exercise of stock options                    ---           ---         2,400            18
  Advance on shareholder  note                               ---           ---           ---           ---
  Stock issued upon conversion
      of convertible notes                                   ---           ---       220,000         1,430
  Payment of cash in lieu of fractional shares               ---           ---            (8)          ---
                                                      ----------    ----------    ----------    ----------
BALANCE AT JULY 31, 1998                              13,333,333    $   15,701     6,079,908    $   14,615

  Net loss                                                   ---           ---           ---           ---
      Foreign currency translation adjustment                ---           ---           ---           ---
 Comprehensive loss                                          ---           ---           ---           ---

  Proceeds from exercise of warrants                         ---           ---        39,799           248
  Repurchase of common stock                                 ---           ---       (10,680)          (90)
  Repayment on shareholder notes                             ---           ---           ---           ---
  Payment of cash in lieu of fractional shares               ---           ---            (1)          ---
  Stock options granted to non-employees                     ---           ---           ---           203
                                                      ----------    ----------    ----------    ----------

BALANCE AT JULY 31, 1999                              13,333,333    $   15,701     6,109,026    $   14,976
                                                      ==========    ==========    ==========    ==========
</TABLE>

<TABLE>
                                                                                    Accumulated
                                                     Shareholder                        other                            Total
                                                        notes        Accumulated    comprehensive   Comprehensive    shareholders'
                                                      receivable       deficit      income (loss)    income (loss)      equity
                                                      ----------      ----------      ----------      ----------      ----------
<S>                                                   <C>             <C>             <C>                             <C>
BALANCE AT JULY 31, 1996                                     ---      $     (416)     $        3                      $    1,512

  Net loss                                                   ---          (1,701)            ---      $   (1,701)         (1,701)
       Foreign currency translation adjustment               ---             ---             (25)            (25)            (25)
                                                                                                      ----------
 Comprehensive loss                                          ---             ---             ---      $   (1,726)            ---
                                                                                                      ==========

  Stock issued in connection
     with receipt of tax credit                              ---             ---             ---                              38
  Proceeds from exercise of stock options                   (124)            ---             ---                             192
  Stock issued in connection with acquisitions               ---             ---             ---                           3,291
  Stock issued under private placement
     (net proceeds)                                          ---             ---             ---                           5,529
  Proceeds from exercise of warrants                         ---             ---             ---                              32
  Repurchase of common stock                                 ---             ---             ---                             (33)
                                                      ----------      ----------      ----------                      ----------
BALANCE AT JULY 31, 1997                              $     (124)     $   (2,117)     $      (22)                     $    8,835

  Net loss                                                   ---          (4,594)            ---      $   (4,594)         (4,594)
       Foreign currency translation adjustment               ---             ---            (207)           (207)           (207)
                                                                                                      ----------
 Comprehensive loss                                          ---             ---             ---      $   (4,801)            ---
                                                                                                      ==========

  Stock issued upon conversion
      of convertible note                                    ---             ---             ---                             128
  Stock issued in connection with acquisition
      contingent upon satisfaction of
      certain conditions (Note 2)                            ---             ---             ---                             ---
  Repurchase of common stock                                 ---             ---             ---                             (25)
  Proceeds from exercise of stock options                    ---             ---             ---                               9
  Stock issued in connection with Series A
      convertible preferred stock, net of costs              ---             ---             ---                          15,701
  Proceeds from exercise of warrants                         ---             ---             ---                           1,957
  Proceeds from exercise of stock options                    ---             ---             ---                              18
  Advance on shareholder  note                              (159)            ---             ---                            (159)
  Stock issued upon conversion
      of convertible notes                                   ---             ---             ---                           1,430
  Payment of cash in lieu of fractional shares               ---             ---             ---                             ---
                                                      ----------      ----------      ----------                      ----------
BALANCE AT JULY 31, 1998                              $     (283)     $   (6,711)     $     (229)                    $    23,093

  Net loss                                                   ---          (4,884)            ---      $   (4,884)         (4,884)
      Foreign currency translation adjustment                ---             ---              55              55              55
                                                                                                      ----------
 Comprehensive loss                                          ---             ---             ---      $   (4,829)            ---
                                                                                                      ==========

  Proceeds from exercise of warrants                         ---             ---             ---                             248
  Repurchase of common stock                                 ---             ---             ---                             (90)
  Repayment on shareholder notes                             190             ---             ---                             190
  Payment of cash in lieu of fractional shares               ---             ---             ---                             ---
  Stock options granted to non-employees                     ---             ---             ---                             203
                                                      ----------      ----------      ----------                      ----------
BALANCE AT JULY 31, 1999                              $      (93)     $  (11,595)     $     (174)                     $   18,815
                                                      ==========      ==========      ==========                      ==========
</TABLE>


                                      -21-
<PAGE>
                                   SONUS CORP.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)


<TABLE>
                                                                                         Years ended July 31,
                                                                              -----------------------------------------
                                                                                1999             1998             1997
                                                                              --------         --------        --------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                           <C>              <C>             <C>
     Net loss                                                                 $ (4,884)        $ (4,594)       $ (1,701)
     Adjustments to reconcile net loss to net cash
     used in operating activities:
          Bad debt expense                                                         389              412              47
          Depreciation and amortization                                          2,450            1,361             790
          Compensation cost for options granted to non-employees                   203              ---             ---
     Changes in operating assets and liabilities, net of effects
     of acquisitions:
          Accounts receivable                                                     (554)             (51)           (530)
          Other receivables                                                        172             (181)           (237)
          Inventory                                                                560             (405)            (61)
          Prepaid expenses                                                         (59)              24            (136)
          Accounts payable and accrued liabilities                                (558)           1,231           1,222
                                                                              --------         --------        --------
               Net cash used in operating activities                            (2,281)          (2,203)           (606)
                                                                              --------         --------        --------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Maturity (purchase) of short-term investments                               6,408           (6,408)            ---
     Purchase of property and equipment                                         (3,368)          (1,414)         (1,191)
     Additional costs related to acquisitions                                     (188)            (198)           (149)
     Deferred acquisition costs and other, net                                      88               (1)            177
     Net cash used in business acquisitions                                     (2,062)          (3,765)         (2,858)
                                                                              --------         --------        --------
               Net cash provided by (used in) investing activities                 878          (11,786)         (4,021)
                                                                              --------         --------        --------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Net repayments of long-term debt
          and capital lease obligations                                         (1,626)          (1,625)            (58)
     Deferred financing costs, net                                                   3              (20)             42
     Net advances (repayments) of bank loans and
          short-term notes payable                                                 454              (39)            ---
     Advances from (payments to) shareholders                                      190             (159)           (124)
     Issuance of common stock for cash, net of costs                               248            1,984           5,915
     Issuance of preferred stock for cash, net of costs                            ---           15,701             ---
     Acquisition of treasury stock                                                 (90)             (25)            (33)
                                                                              --------         --------        --------
               Net cash provided by (used in) financing activities                (821)          15,817           5,742
                                                                              --------         --------        --------

Net change in cash and cash equivalents                                         (2,224)           1,828           1,115

Effect on cash and cash equivalents of changes
     in foreign translation rate                                                     2             (207)            (27)

Cash and cash equivalents, beginning of year                                     2,720            1,099              11
                                                                              --------         --------        --------
Cash and cash equivalents, end of year                                        $    498         $  2,720        $  1,099
                                                                              ========         ========        ========
Supplemental disclosure of non-cash investing and financing activities:
  Interest paid during the year                                               $    218         $    149        $     47
  Non-cash financing activities:
     Issuance and assumption of debt in acquisitions                          $  2,611         $  1,781        $    676
     Issuance of convertible notes in acquisitions                                 ---              ---           2,600
     Issuance of common stock in acquisitions                                      ---              ---           3,291
     Issuance of debt for covenants not to compete with purchase
           price adjustments for acquisitions completed in fiscal year 1998        650              ---             ---
     Issuance of common stock upon conversion of convertible note                  ---            1,557             ---
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      -22-
<PAGE>
                                   SONUS CORP.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JULY 31, 1999 AND 1998


NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Description of Company
         ----------------------

         Sonus Corp., a Yukon  Territory,  Canada  corporation  (the "Company"),
through  its  primary  operating  subsidiaries,  Sonus-Canada  Ltd.,  a  British
Columbia,  Canada corporation,  Sonus-USA,  Inc., a Washington corporation,  and
Sonus-Texas,  Inc.,  an Oregon  corporation,  owns and  operates 99 hearing care
centers in the United States and Western Canada.  The centers are located in the
states of Arizona, California, Illinois, Michigan, Missouri, New Mexico, Oregon,
Texas,  and Washington,  and in the Canadian  provinces of British  Columbia and
Alberta.  Each of the  Company's  hearing  care  centers  provides  its  hearing
impaired patients with a full range of audiological  products and services.  The
Company  intends to expand its  network of  hearing  care  centers by  acquiring
centers in its existing,  as well as new, geographic  markets.  The Company also
operates a franchise  licensing program called The Sonus Network.  Licensees are
entitled  to use the Sonus name and  receive  other  benefits  such as  practice
management advice and training,  group buying discounts, and marketing services.
The Company,  through its subsidiary  Hear PO Corp.,  a New Mexico  corporation,
also operates as an independent  provider  association  and hearing care benefit
administrator.  Hear PO Corp. obtains contracts to provide hearing care benefits
to managed  care group and  corporate  health  care  organizations  through  its
approximately 1,100 affiliated  audiologists,  sells Hear PO brand private label
hearing  instruments,  and  operates  as  a  buying  group  for  its  affiliated
audiologists.

         Principles of Consolidation
         ---------------------------

         The  consolidated  financial  statements  include the Company's  wholly
owned subsidiaries. All significant inter-company accounts have been eliminated.
The  functional  currency of the Company's  Canadian  operations is the Canadian
dollar while the  functional  currency of the Company's  U.S.  operations is the
U.S.  dollar.  In accordance  with Statement of Financial  Accounting  Standards
("SFAS") No. 52, "Foreign Currency Translation", assets and liabilities recorded
in Canadian  dollars are remeasured at current rates in existence at the balance
sheet date.  Revenues  and expenses are  remeasured  using the weighted  average
exchange rate for the period.  Exchange gains and losses from  remeasurement  of
assets and  liabilities  recorded in Canadian  dollars are treated as unrealized
gains and losses and reported as a separate component of shareholders' equity.

         Revenue Recognition
         -------------------

Revenues from the sale of hearing instrument products are recognized at the time
of delivery. Revenues from the provision of hearing care diagnostic services are
recognized at the time that such services are performed.


                                      -23-
<PAGE>

         Income Taxes
         ------------

         The Company  accounts  for income  taxes under the asset and  liability
method.  Under  the  asset  and  liability  method,   deferred  tax  assets  and
liabilities  are  recognized  for the future tax  consequences  attributable  to
differences  between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards.  Deferred tax assets and  liabilities  are measured using enacted
tax rates  expected  to apply to  taxable  income  in the  years in which  those
temporary  differences  are expected to be  recovered or settled.  The effect on
deferred tax assets and  liabilities  of a change in tax rates is  recognized in
income in the period that includes the enactment date. A valuation  allowance is
established  when necessary to reduce deferred tax assets to the amount expected
to be realized.

         Cash and Cash Equivalents
         -------------------------

         Cash equivalents consist of short-term,  highly liquid investments with
original maturities of 90 days or less.

         Short-term Investments
         ----------------------

         Short-term  investments consist of  available-for-sale  securities,  as
defined by SFAS No. 115,  "Accounting for Certain Investments in Debt and Equity
Securities".  Under  SFAS No.  115,  unrealized  holding  gains and  losses  are
reflected as a net amount in a separate component of shareholders'  equity until
realized.  At July 31,  1999,  the Company  had no  short-term  investments  and
therefore no unrealized holding gains or losses. At July 31, 1998, there were no
unrealized  holding  gains  or  losses  as the  market  value  of the  Company's
available-for-sale securities approximated cost. Gross realized gains and losses
on sales of  available-for-sale  securities for fiscal 1999, 1998, and 1997 were
nominal.  Realized  gains and  losses  are  computed  by  determining  cost on a
specific identification basis.

         At July 31, 1998, the Company's short-term investments consisted of the
following debt securities  which had maturities of less than six months and were
carried at cost which approximated market (in thousands):

             Corporate Bonds                    $2,760

             Discount Commercial Paper           3,648
                                                ------
                                                $6,408
                                                ======

         Gross  proceeds  from  sales  and   maturities  of   available-for-sale
investments  during  fiscal  1999  and 1998  were  $6,408,000  and  $18,511,000,
respectively.

         Inventory
         ---------

         Inventory primarily consists of hearing instruments, hearing instrument
batteries,  and assistive  listening  devices and is stated at the lower of cost
(first in, first out) or net realizable value.

                                      -24-
<PAGE>

         Property and Equipment
         ----------------------

         Property and equipment are recorded at cost and  depreciated  using the
straight-line method over the following useful lives:

         Professional equipment                                   Seven years
         Office equipment                                         Five years
         Leasehold improvements                                   Five years
         Computer equipment and software                          Five years

         Property and equipment purchased under capitalized leases are amortized
over the  shorter of the lease  term or their  estimated  useful  lives and such
depreciation  is included with  depreciation  expense.  On November 1, 1997, the
Company  changed the method by which it calculates  depreciation on property and
equipment to the straight-line method.  Previously,  professional  equipment was
depreciated  using the 20%  declining  balance  method and  office and  computer
equipment and  automobiles  were  depreciated  using the 30%  declining  balance
method.  The Company also adopted a useful life of seven years for  professional
equipment  and five years for office  equipment.  The  cumulative  effect of the
changes  adopted by the Company for the fiscal year ended July 31, 1998, was not
significant.

         Advertising Expense
         -------------------

         The Company defers its  advertising  costs until the  advertisement  is
actually run, at which time the full expense is recognized. Deferred advertising
costs were $84,000 and $0 at July 31, 1999 and 1998,  respectively.  Advertising
expense was  $3,632,000,  $2,786,000  and  $786,000 for the years ended July 31,
1999, 1998, and 1997, respectively.

         Goodwill and Covenants Not to Compete
         -------------------------------------

         The  unallocated  purchase  costs in excess of the net assets  acquired
(goodwill)  is being  amortized on the  straight-line  basis over twenty  years.
Non-compete  agreements are amortized on the straight-line basis over the period
benefited. Goodwill and covenants not to compete are as follows as of July 31:

         (in thousands)                                 1999              1998
                                                        ----              ----
         Goodwill                                     $19,774           $15,611

         Covenants not to compete                       2,226             1,578

         Less:  Accumulated amortization               (2,232)           (1,037)
                                                       ------            ------

                                                      $19,768           $16,152
                                                      =======           =======

         Amortization  charged  to  operations  was  $1,195,000,   $635,000  and
$364,000 for the years ended July 31, 1999, 1998 and 1997, respectively.

                                      -25-
<PAGE>

         Deferred Acquisition and Financing Costs
         ----------------------------------------

         Costs  related to the  acquisition  of centers are deferred  and,  upon
successful completion of acquisitions,  are allocated to the assets acquired and
are  subject  to the  accounting  policies  outlined  above.  Costs  related  to
potential  acquisitions  that are  unsuccessful  are  expensed in the periods in
which it is determined  that such  acquisitions  are unlikely to be consummated.
Costs  related  to issuing  shares are  deferred  and upon the  issuance  of the
related shares, are applied to reduce the net proceeds of the issue.

         Impairment of Long-Lived Assets
         -------------------------------

         The Company assesses the recoverability of long-lived assets, including
goodwill,  by determining  whether the carrying  amount of the long-lived  asset
over its remaining live can be recovered through  undiscounted  projected future
cash flows.  The Company has not  recognized  any  impairment  losses during the
years ended July 31, 1999, 1998, and 1997.

         Net Loss Per Share
         ------------------

         On August 1, 1997,  the Company  adopted  SFAS No. 128,  "Earnings  Per
Share", which provides that "basic net income (loss) per share" and "diluted net
income  (loss)  per share"  for all  periods  presented  be  computed  using the
weighted  average  number of common  shares  outstanding  during the  respective
period,  with diluted net income per share  including the effect of  potentially
dilutive common shares.  Common stock  equivalents  related to convertible debt,
convertible  preferred stock, stock options, and warrants are anti-dilutive and,
therefore,  not included in the 1999, 1998, and 1997 diluted net loss per share.
Furthermore,  there were no reconciling  items to obtain net loss  applicable to
common  shareholders  from the  Company's  net loss for the years ended July 31,
1999, 1998, and 1997.

         Comprehensive Income (Loss)
         ---------------------------

         On August  1,  1998,  the  Company  adopted  SFAS No.  130,  "Reporting
Comprehensive  Income".  SFAS No. 130  establishes  standards  for reporting and
presentation  of  comprehensive  income  and  its  components  in a full  set of
financial statements.  Comprehensive income (loss) consists of net income (loss)
and foreign currency translation adjustment and is presented in the consolidated
statement  of  shareholders'  equity.  SFAS No.  130  requires  only  additional
disclosures in the  consolidated  financial  statements;  it does not affect the
Company's  financial  position or results of  operations.  Prior year  financial
statements  have been  reclassified  to conform to the  requirements of SFAS No.
130.

         Stock Based Compensation
         ------------------------

         The Company  accounts for its stock plans in  accordance  with SFAS No.
123, "Accounting for Stock-Based  Compensation",  which establishes a fair value
method of  accounting  for stock plans.  As allowed by SFAS No. 123, the Company
has elected to continue to apply Accounting Principles Board Opinion ("APB") No.
25,  "Accounting for Stock Issued to Employees",  which  prescribes an intrinsic
value based  method of  accounting  for stock plans  covering  employees  and to
provide the pro-forma  disclosures  of the effects of SFAS No. 123 on net income
(loss) and net income (loss) per share.

                                      -26-
<PAGE>

         Concentrations of Credit Risk
         -----------------------------

         Financial  instruments,   which  potentially  subject  the  Company  to
concentration  of  credit  risk,   consist   principally  of  cash,   short-term
investments, and trade receivables. The Company places its cash with high credit
quality  institutions.  At times,  such  amounts may be in excess of the Federal
Deposit Insurance  Corporation  insurance  limits.  The Company's trade accounts
receivable are derived from numerous private payers, insurance carriers,  health
maintenance organizations and government agencies.  Concentration of credit risk
relating to trade accounts receivable is limited due to the diversity and number
of patients and payers.

         Fair Value of Financial Instruments
         -----------------------------------

         The  carrying  value  of  financial  instruments  such as cash and cash
equivalents,  short-term  investments,  accounts receivable,  other receivables,
trade payables,  notes payable,  and convertible notes payable approximate their
fair value because of the short-term nature of these  instruments.  The carrying
amount of the  Company's  long-term  debt  approximates  fair value  because the
interest  rates  approximate  the rates that  management  believes are currently
available  to the  Company.  The carrying  amount of capital  lease  obligations
approximates fair value.

         Use of Estimates
         ----------------

         The  preparation of financial  statements in conformity  with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect the reported  amounts of assets and liabilities and the
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

         Reclassifications
         -----------------

         Certain  amounts in the 1997 and 1998  financial  statements  have been
reclassified to conform with the 1999 presentation.

NOTE 2.  ACQUISITIONS

         During the fiscal year ended July 31,  1999,  the  Company  acquired 31
hearing care centers in 17 transactions. Each transaction was accounted for as a
purchase.  The acquired assets and liabilities  were recorded at their estimated
fair values at the date of  acquisition,  and the  unallocated  excess  purchase
price  (goodwill) is being amortized on a straight line basis over 20 years. The
operating  results of each  acquisition  have been included in the  consolidated
statements of operations  from the  respective  acquisition  date. The aggregate
purchase  price for the  acquisitions  consisted of cash payments of $1,704,000,
promissory  notes  issued by the Company of  $1,749,000  generally  payable over
three  years,  and  $900,000  in  assumed  liabilities.   As  a  result  of  the
acquisitions, the Company recorded approximately $95,000 in accounts receivable,
$90,000 in  inventory,  $457,000 in  property  and  equipment,  $20,000 in other
assets,   and   $3,700,000  in  goodwill,   which   included  costs  related  to
acquisitions.  In  addition  to the  purchase  price for the  acquisitions,  the
Company also recorded  $299,000 for  covenants not to compete,  of which $79,000
was paid in cash at the time of  closing,  with the balance  payable  over three
years.

                                      -27-
<PAGE>

         During the fiscal year ended July 31,  1998,  the  Company  acquired 33
centers and one hearing  care benefit  administrator  in 18  transactions.  Each
transaction was accounted for as a purchase. The acquired assets and liabilities
were recorded at their estimated fair values at the date of acquisition, and the
unallocated  excess  purchase price  (goodwill) is being amortized on a straight
line basis over 20 years.  The operating  results of each  acquisition have been
included  in the  consolidated  statements  of  operations  from the  respective
acquisition date. The aggregate purchase price for the acquisitions consisted of
cash  payments  of  $3,650,000,  promissory  notes  issued  by  the  Company  of
$1,781,000  generally  payable  over  three  years,  and  $3,072,000  in assumed
liabilities. In addition,  $1,405,000 will be paid and 22,936 Common Shares that
have been  issued  but are being held by the  Company  will be  released  over a
three-year  period if certain annual net revenue targets are met. As a result of
the  acquisitions,  the Company  recorded  approximately  $1,186,000 in accounts
receivable,  $137,000 in inventory,  $629,000 in property and equipment, $96,000
in other assets,  and  $6,455,000 in goodwill,  which  included costs related to
acquisitions.  In  addition  to the  purchase  price for the  acquisitions,  the
Company also recorded  $623,000 for covenants not to compete,  of which $157,000
was paid in cash at the time of  closing,  with the balance  payable  over three
years.

         The following  unaudited pro forma financial  information  reflects the
historical operations of the hearing care centers acquired by the Company during
the fiscal year ended July 31, 1999 (the  "Acquisitions"),  from August 1, 1998,
to the date of  acquisition.  Such financial  information  has been prepared for
comparative  purposes  only and is not  necessarily  indicative of the Company's
combined  financial  position or the results of operations  that actually  would
have occurred if the  Acquisitions  had been  consummated on August 1, 1997, for
the fiscal  year ended July 31,  1998,  and August 1, 1998,  for the fiscal year
ended July 31,  1999.  In  addition,  such  information  is not intended to be a
projection of results of  operations  that may be obtained by the Company in the
future.

                                                              FISCAL YEAR
        (in thousands,
        except per share amounts)                       1999               1998
                                                        ----               ----

        Net revenues                                  $37,756            $30,818

        Net loss                                      $ 4,688            $ 4,206

        Net loss per share (basic and diluted)        $  0.77            $  0.82


NOTE 3.  PROPERTY AND EQUIPMENT

         Property and equipment consist of the following as of July 31:

         (in thousands)                                1999              1998
                                                      ------            ------
         Professional equipment                       $2,154            $1,521
         Office equipment                                926               707
         Leasehold improvements                        1,030               760
         Computer equipment and software               4,689             2,012
                                                       -----             -----
                                                       8,799             5,000
         Less accumulated depreciation                (2,591)           (1,393)
                                                      ------            ------
                                                      $6,208            $3,607
                                                      ======            ======


                                      -28-
<PAGE>

NOTE 4.  CONVERTIBLE NOTES PAYABLE

         At July 31,  1998,  the Company had  outstanding  non-interest  bearing
notes in the amount of $1,170,000  convertible  at any time into 180,000  Common
Shares at a rate of $6.50 per share. During the fiscal year ended July 31, 1999,
$239,000 of the notes were paid, leaving a balance outstanding at July 31, 1999,
of $931,000 (convertible into 143,000 Common Shares) that became due and payable
on August 1, 1999.

NOTE 5.  CAPITAL LEASES

The  following  is a schedule by year of future  minimum  lease  payments  under
capital leases together with the present value of the net minimum lease payments
as of July 31, 1999 (in thousands):

     2000......................................................    $142
     2001......................................................      99
                                                                   ----
     Total minimum lease payments..............................     241
     Less:  amount representing interest.......................     (16)
                                                                   ----
     Present value of minimum lease payments...................     225
     Less current portion......................................    (129)
                                                                   ----
                                                                   $ 96
                                                                   ====

Total assets under  capitalized  leases at July 31, 1999 and 1998, were $112,000
and  $271,000,  net  of  accumulated  depreciation  of  $375,000  and  $244,000,
respectively.

NOTE 6.  LONG-TERM DEBT

         Long-term debt consists of the following as of July 31 (in thousands):

<TABLE>
                                                                                            1999          1998
                                                                                            ----          ----
<S>                                                                                       <C>            <C>

         Installment notes incurred in connection with  acquisitions  payable in
         monthly installments due from 2000 to 2003 with a weighted
         average interest rate of 7.2%, partially secured by purchased assets..........   $ 460          $ 322

         Installment notes incurred in connection with  acquisitions  payable in
         quarterly installments due from 2000 to 2001 with a weighted
         average interest rate of 6.5%, partially secured by purchased assets..........     517            150

         Installment notes incurred in connection with acquisitions payable in annual
         installments due from 1999 to 2004 with a weighted
         average interest rate of 6.2%, partially secured by purchased assets..........   2,167          1,910

         Non-interest bearing installment obligations for covenants not to compete
         due from 1999 to 2001 (net of discount of $83), partially secured by assets
         purchased in related acquisitions.............................................     637            460

         Equipment loans from suppliers with interest rates from 7.8% to 18% per annum
         due 1999 to 2003, secured by equipment........................................     366             51

         Working capital loan from a supplier with floating interest rate of prime
         plus3/4% due 2001, secured by certain accounts receivable.....................     500            ---
                                                                                        -------      ---------

                                                                                          4,647          2,893
           Less current portion........................................................  (2,150)        (1,160)
                                                                                         ------       ---------
                                                                                      $   2,497      $   1,733
                                                                                       =========     =========
</TABLE>

Annual  maturities  of  long-term  debt are as follows  (in  thousands):  2000 -
$2,150; 2001 - $1,743; 2002 - $489; 2003 - $232; 2004 - $17; thereafter - $16.

                                      -29-
<PAGE>

NOTE 7.  SHAREHOLDERS' EQUITY

         Series A Convertible Preferred Shares

         In December 1997, the Company  issued  13,333,333  Series A Convertible
Preferred Shares (the "Series A Shares") in a private  placement.  The following
summarizes certain terms of the Series A Shares:

         Voting  Rights.  Each Series A Share is entitled to one-fifth of a vote
(or such other  number of votes equal to the number of Common  Shares into which
such Series A Share shall be  convertible  from time to time) in the election of
directors and any other matters presented to the shareholders of the Company for
action or consideration.

         Dividends.  Each Series A Share is entitled to receive, when, as and if
declared by the board of  directors of the Company out of the  Company's  assets
legally  available for payment,  cumulative  dividends from the date of original
issuance,  payable  annually at a rate of 5% per annum on a base amount of $1.35
per share  (the  "Base  Amount").  As of July 31,  1999,  cumulative  undeclared
dividends amounted to approximately $1,425,000. All accrued and unpaid dividends
will be forfeited upon the conversion of the Series A Shares.  The dividend rate
is subject to increase on specified  dates in the event that certain  conditions
(the "Triggering  Conditions") have not been met. The Triggering  Conditions are
as follows:

     (a) The  Common  Shares  are  listed on the New York  Stock  Exchange,  the
American Stock Exchange,  or the Nasdaq National Market (each a "U.S.  Principal
Market");

     (b) The  Common  Shares are  traded on a U.S.  Principal  Market at a daily
closing  price  greater  than  $12.00  per  Common  Share  on  each  of the  ten
consecutive trading days preceding the applicable date; and

     (c) The Company's net income before income taxes, dividends on the Series A
Shares,  and amortization of goodwill and covenants not to compete for the three
consecutive fiscal quarters preceding the applicable date shall have averaged at
least $.35 per fully  diluted  Common Share per fiscal  quarter (for purposes of
making  this  calculation,  the Common  Shares  issuable  upon the  exercise  of
warrants issued in connection with the Series A Shares will not be counted).

         If the Triggering Conditions have not been met by:

         (x) January 1, 2003, the dividend rate will thereafter be 15% per annum
of the Base Amount;

         (y) January 1, 2004, the dividend rate will thereafter be 18% per annum
of the Base Amount; or

         (z) January 1, 2005, the dividend rate will thereafter be 21% per annum
of the Base Amount.

         As soon as the Triggering Conditions have been satisfied,  the dividend
rate will revert to 5% per annum of the Base Amount.

                                      -30-
<PAGE>

         Liquidation  Preference.  In the event of any voluntary or  involuntary
liquidation,  dissolution, or winding up of the Company subject to the rights of
holders of any  securities of the Company  ranking senior to the Series A Shares
upon  liquidation,  the  holders of Series A Shares will be entitled to receive,
out of the assets of the Company  available for  distribution  to  shareholders,
before any  distribution  of assets is made to  holders of Common  Shares or any
other  securities  ranking  junior to the Series A Shares  upon  liquidation,  a
liquidating  distribution  in an amount  equal to the  greater  of (i) $1.35 per
share plus any accrued and unpaid  dividends  or (ii) the amount that would have
been  distributable  to such holders if they had converted their Series A Shares
into  Common  Shares  immediately  prior to such  dissolution,  liquidation,  or
winding  up,  plus any  accrued  and  unpaid  dividends.  The sale,  conveyance,
mortgage,  pledge or lease of all or substantially all the assets of the Company
will  be  deemed  to be a  liquidation  of  the  Company  for  purposes  of  the
liquidation rights of the holders of Series A Shares.  After payment of the full
amount of the liquidating  distribution to which they are entitled,  the holders
of  Series A Shares  will  have no right to any of the  remaining  assets of the
Company.

         Optional  Redemption.  The Series A Shares may not be  redeemed  before
December 24, 2002. Thereafter, the Series A Shares may be redeemed at the option
of the  Company,  in whole or in part.  The  redemption  price will be an amount
equal to the  greater  of (i)  $1.35  per  share  plus any  accrued  and  unpaid
dividends or (ii) the fair market value of a Series A Share as  determined  by a
nationally  recognized  independent  investment  banking firm selected by mutual
agreement of the Company and the holder of a majority of the outstanding  Series
A Shares.  The Series A Shares are not subject to  mandatory  redemption  or any
sinking fund provisions.

         Conversion Rights. The Series A Shares may be converted at any time, in
whole or in part, at the option of the holder thereof,  into Common Shares.  The
conversion  rate is presently  equal to one Common Share for every five Series A
Shares  surrendered  for  conversion.  The conversion rate is subject to further
adjustment  for stock  dividends,  stock  splits,  recapitalizations,  and other
anti-dilution  adjustments.  Upon the  conversion  of any  Series A Shares,  any
accrued and unpaid dividends with respect to such shares will be forfeited.  The
Company has the right to force conversion of the Series A Shares, in whole or in
part, upon satisfaction of certain conditions.

         Release of Escrowed Shares
         --------------------------

         Effective  with the listing of the Common Shares on the American  Stock
Exchange on February 10, 1998, 850,000 common shares owned by certain members of
the  Company's  management  were  released  from  escrow  by The  Alberta  Stock
Exchange.  The  shares,  which had been  excluded  from the  calculation  of the
average  shares  outstanding  during the fiscal  year ended July 31,  1997,  are
included in such calculation for the fiscal years ended July 31, 1998 and 1999.

         Share Purchase Warrants
         -----------------------

     At July 31,  1999,  the Company had  outstanding  share  purchase  warrants
issued in  connection  with the  Series A Shares to  purchase  2,000,000  Common
Shares at an exercise  price of $12.00 per share until  December 24,  2002.  The
terms of the share  purchase  warrants  were  amended on  October  1,  1999,  in
connection  with the issuance of the Company's  Series B  Convertible  Preferred
Shares to reduce the exercise price to $6.75 per share and extend the expiration
date to October 1, 2004. The Company may force the exercise of the warrants upon
satisfaction of all the Triggering Conditions, except that the Common Shares are
only required to be traded on a U.S.  Principal  Market at a daily closing price
greater  than  $8.00  instead  of  $12.00  per  Common  Share on each of the ten
consecutive trading days preceding the applicable date.

                                      -31-
<PAGE>

     In August 1998,  the Company issued 39,799 Common Shares at $6.25 per share
in connection  with the exercise of share purchase  warrants issued in September
and December 1996. In February 1998, the Company issued 373,998 Common Shares at
$5.23 per share  pursuant to the exercise of share purchase  warrants  issued by
the Company in February 1996.

         Stock Option Plans
         ------------------

         The Company has two stock  option  plans,  the Stock Option Plan ("1993
Plan") and the Second Amended and Restated  Stock Award Plan ("1996 Plan").  The
Company may grant to officers,  directors,  employees and consultants  incentive
and  non-qualified  options to purchase up to 2,300,000  Common Shares under the
1996 Plan. There are options to purchase 245,000 Common Shares outstanding under
the 1993 Plan;  no further  options  will be  granted  under the 1993 Plan.  The
exercise  price of options  granted under the 1996 Plan may not be less than 75%
of the fair market  value of the  Company's  Common  Shares at the date of grant
(100% for tax-qualified incentive stock options).  Options become exercisable at
the date of grant or in equal annual  installments  over a period of one to four
years from the date of grant.  The options  generally  expire either five or ten
years after the date of grant.

         The 1996 Plan also provides for the grant of stock appreciation rights,
restricted units,  performance awards and other stock-based  awards. The Company
had no such awards or rights outstanding at July 31, 1999 or 1998.


                                      -32-
<PAGE>




         The activity during the fiscal years ended July 31 was as follows:


<TABLE>
                                             1999                            1998                            1997
                                             ----                            ----                            ----
                                                      Weighted-                        Weighted-                       Weighted-
                                                       Average                         Average                         Average
                                                       Exercise                        Exercise                        Exercise
                                     Options             Price        Options            Price        Options            Price
                                     -------             -----        -------            -----        -------            -----
<S>                                  <C>                 <C>           <C>               <C>           <C>               <C>
Outstanding - beginning of           1,560,000           $7.54         488,400           $6.41         340,000           $4.15
year

           Granted                     655,000           $5.56       1,138,000           $8.12         368,400           $6.85
          Exercised                         --              --         (12,400)          $2.10        (155,000)          $2.05
           Canceled                   (187,000)          $8.70         (54,000)          $9.79         (65,000)          $7.50
                                     ---------                       ---------                        --------

Outstanding - end of year            2,028,000           $6.74       1,560,000           $7.54         488,400           $6.41
                                     =========                       =========                         =======

Exercisable at end of year             808,441           $6.54         363,200           $5.98         177,500           $5.95

Weighted-average fair value
of options granted during the
year                                                     $4.26                           $8.38                           $4.47
</TABLE>

         The  following  table  summarizes   information   about  stock  options
outstanding at July 31, 1999:

<TABLE>
                                       Options Outstanding                              Options Exercisable
                      -------------------------------------------------------   -------------------------------------
                                              Weighted-
                                               Average          Weighted-            Number            Weighted -
                      Number Outstanding      Remaining          Average           Exercisable           Average
     Range of               as of            Contractual         Exercise             as of             Exercise
  Exercise Prices       July 31, 1999           Life              Price           July 31, 1999           Price
--------------------  -------------------  ----------------   ---------------   ------------------   ----------------
<S>        <C>                   <C>                  <C>             <C>                 <C>                 <C>
   $1.00-- $2.00                  60,000              1.39             $1.26               60,000             $ 1.26
   $2.01-- $3.50                  25,000              1.55             $3.32               25,000             $ 3.32
   $3.51-- $5.00                 125,000              9.87             $4.22                5,357             $.4.22
   $5.01-- $6.50                 696,000              7.73             $5.97              281,334             $ 6.10
   $6.51-- $8.00                 795,000              7.59             $6.94              331,000             $ 7.06
   $8.01-- $9.50                  96,000              5.66             $8.61               48,000             $ 8.96
  $9.51-- $12.00                 231,000              8.52            $10.82               57,750             $10.82
--------------------  -------------------  ----------------   ---------------   ------------------   ----------------

  $1.00-- $12.00               2,028,000              7.54             $6.74              808,441             $ 6.54
                               =========                                                  =======
</TABLE>

           No compensation  cost has been recognized for its stock option grants
  to  employees  under APB No. 25. Total  compensation  cost  recognized  in the
  statements of operations for options granted to  non-employees  under SFAS No.
  123 during the years ended July 31, 1999,  1998, and 1997,  was $203,000,  $0,
  and $0,  respectively.  Pro forma information  regarding net income (loss) and
  net  income  (loss)  per share is  required  under  SFAS No.  123 and has been
  determined as if the Company had  accounted for all 1999,  1998 and 1997 stock
  option  grants  based on the fair  value  method.  The pro  forma  information
  presented below is not representative of the effect stock options will have on
  pro forma net income (loss) or net income (loss) per share for future years.

           The fair value of each option grant is estimated on the date of grant
  using the Black-Scholes multiple  option-pricing model. The following weighted
  average  assumptions were used for grants in 1999,  1998, and 1997:  risk-free
  interest rates of 5.92%, 5.5% and 5.94%, respectively; an expected option life
  of 7.52 years, 7.69 years and 4.92 years, respectively; expected volatility of
  90%, 114% and 96%, respectively; and dividend yield of zero.

                                      -33-
<PAGE>

           The Black-Scholes  method is one of many models used to calculate the
  fair value of options that are freely  tradable,  fully  transferable and that
  have no vesting  restrictions.  These  models also require  highly  subjective
  assumptions,  including  future stock price volatility and expected time until
  exercise, which greatly affect the calculated values.

           Had  compensation  cost for these plans been determined  based on the
  fair value of awards at the grant date,  as  prescribed  by SFAS No. 123,  net
  loss and net loss per share would have been as follows:

<TABLE>
                                                                      1999            1998            1997
                                                                      ----            ----            ----
                                                                      (in thousands, except per share data)

           Net loss applicable to common shareholders:
<S>                                                                <C>            <C>             <C>
               As reported                                         $(4,884)       $(4,594)        $(1,701)
               Pro forma (1)                                       $(6,176)       $(5,988)        $(3,276)
           Net loss per share (basic and diluted):
               As reported                                          $(0.80)        $(0.89)        $ (0.42)
               Pro forma (1)                                        $(1.01)        $(1.16)        $ (0.82)
</TABLE>


  (1) SFAS No. 123  applies to awards  granted in fiscal  years that begin after
  December 15, 1994.  Consequently,  the effects of applying  SFAS No. 123 shown
  here are not likely to be representative of the effects in future years due to
  the  exclusion  of awards  granted in prior years but vesting  (and  therefore
  expensed) in 1997, 1998, and 1999.

  NOTE 8.  INCOME TAXES

           Sonus Corp.  and its  Canadian  subsidiary  file  separate  corporate
  income tax returns on a stand-alone basis in Canada.  Sonus-USA,  Inc. and its
  subsidiaries file corporate income tax returns in the United States.

           The components of temporary differences that give rise to significant
  portions of deferred income taxes are as follows at July 31 (in thousands):

<TABLE>
                                                    1999                 1998                 1997
                                                    ----                 ----                 ----
<S>                                                 <C>                 <C>                   <C>
     Deferred tax assets:
      Net operating losses carried forward          4,281               $2,443                $839
      Allowance for doubtful accounts                 364                  277                  44
       Other                                           31                   14                 ---
                                                    -----               ------                ----
                                                    4,676                2,734                 883
     Deferred tax liabilities:
       Depreciation                                   (83)                 ---                 ---
       Goodwill and start-up costs                   (305)                (240)                (54)
                                                    -----               ------                ----
                                                    4,288                2,494                 829
     Less valuation allowance                      (4,288)              (2,494)               (829)
                                                    -----               ------                ----
                                                      ---                  ---                 ---
                                                    =====               ======                ====
</TABLE>


                                      -34-
<PAGE>

           A  reconciliation  of the  Company's  expected tax expense  using the
  statutory income tax rate to the actual effective rate is as follows:

<TABLE>
                                                   1999                     1998                      1997
                                                   ----                     ----                      ----
<S>                                                <C>                       <C>                      <C>
Tax benefit at statutory rate                      (34)%                     (34)%                    (34)%
Adjustment for higher Canadian tax rate            ---                        (1)                     ---
Expenses not deductible for tax
purposes                                             5                         3                        5
State taxes, net of federal                         (5)                       (5)                      (4)
Change in valuation allowance
impacting statement of operations                   34                        37                       33
                                                    --                        --                       --
Tax rate per financial statements                  ---%                      ---%                     ---%
                                                   ===                       ===                      ===
</TABLE>

           At July 31, 1999,  the Company had  approximate  net  operating  loss
  carryforwards  for tax purposes  which,  if not utilized,  expire in the years
  ended as follows (in thousands):

                        CANADA               UNITED STATES               TOTAL
2001                       $16                   $ ---                    $16
2002                        24                     ---                     24
2003                       532                     ---                    532
2004                       233                     ---                    233
2005                       278                     ---                    278
2006                        80                     ---                     80
2009                       ---                      24                     24
2010                       ---                      29                     29
2011                       ---                     656                    656
2012                       ---                     781                    781
2013                       ---                   3,932                  3,932
2019                       ---                   3,986                  3,986
                        ------                  ------                -------
                        $1,163                  $9,408                $10,571
                        ======                  ======                =======


         A provision of the Internal  Revenue Code requires the  utilization  of
  net operating losses be limited when there is a change of more than 50 percent
  in ownership of the Company.  Such a change  occurred in December  1997.  This
  ownership  change  may  limit  the  utilization  of any net  operating  losses
  incurred prior to the change in ownership date.

  NOTE 9.  RELATED PARTY TRANSACTIONS

           William  DeJong  is a partner  in the  Calgary,  Alberta  law firm of
  Ballem  MacInnes and is a director of the Company.  Total fees,  disbursements
  and  government  sales tax paid to Ballem  MacInnes  by the  Company for legal
  services as of July 31,  1999,  1998,  and 1997 were  $12,000,  $196,000,  and
  $168,000,  respectively  (converted  from  Canadian  dollars at July 31, 1999,
  1998, and 1997).

                                      -35-
<PAGE>

           Gregory J. Frazer, Ph.D., an officer and director of the Company, and
  Mr.  Frazer's  wife,  were  shareholders  in certain  Hearing Care  Associates
  corporations  that the Company acquired during the fiscal years ended July 31,
  1998 and 1997.  During the fiscal year ended July 31, 1999, the Company issued
  a  three-year  promissory  note  to Mr.  Frazer  in the  principal  amount  of
  $102,000, payable in equal quarterly installments, in connection with purchase
  price  adjustments  for hearing  care  centers  previously  acquired  from Mr.
  Frazer. The Company also entered into expanded non-compete agreements with Mr.
  Frazer and his wife that pay them a total of $10,758 per month until September
  2001. For the fiscal year ended July 31, 1998, the  consideration  paid to Mr.
  Frazer  and  his  wife  in  connection  with  the   acquisitions  and  related
  non-competition  agreements  consisted of $242,179 in cash and $80,520 payable
  in installments over three years. The consideration paid to Mr. Frazer and his
  wife during the fiscal year ended July 31, 1997,  totaled $933,000 in cash and
  294,071 Common Shares at a price of $5.00 per share.

           On May 8, 1997,  Brandon M.  Dawson,  an officer and  director of the
  Company,  exercised  options for 50,000 Common  Shares at $1.35 per share.  In
  connection with the exercise, the Company made loans of $67,500 and $91,000 to
  Mr.  Dawson on May 8, 1997,  and April 24,  1998,  respectively,  to allow Mr.
  Dawson to pay the aggregate  exercise  price of the options and taxes incurred
  as a result of the exercise.  The loans, which bore interest at 10% and 7.75%,
  respectively,  were repaid on July 6, 1999, along with interest of $16,077. On
  October 5, 1997, the Company loaned Mr. Dawson $85,000 in connection  with the
  purchase of his residence.  The loan was repaid on April 10, 1998,  along with
  interest at 10% per annum in the amount of $4,308.  On December 26, 1997,  the
  Company loaned Mr. Dawson $29,187 in order to allow Mr. Dawson to repay a loan
  obtained in connection  with the exercise of options to purchase 20,000 Common
  Shares.  The loan was repaid on March 30, 1999,  along with  interest at 7.75%
  per annum in the amount of $4,287.  On March 19, 1998,  the Company loaned Mr.
  Dawson $32,272, in order to pay taxes incurred as a result of option exercises
  in April 1996.  The loan matures on December 31, 2000,  and bears  interest at
  7.75% per annum.

         On December 8, 1998, the Corporation  loaned Scott E. Klein,  President
and Chief  Operating  Officer of the Company,  $100,000 in  connection  with the
purchase of his primary residence in Portland,  Oregon.  The loan, which was due
on the earlier of the sale of Mr. Klein's  residence in Minnesota or October 31,
1999,  was repaid on June 7, 1999,  along with  interest  at 8% in the amount of
$4,000.

         On July 21, 1999, Cindy Dawson-Austin, mother of Mr. Dawson, loaned the
Company $500,000 for working capital.  The loan, which bears interest at 12% per
annum,  was due on October 18,  1999,  but has not been repaid at the request of
Ms. Dawson-Austin.

  NOTE 10.  401(K) PLAN

           The  Company  sponsors  a  401(k)  plan  for all  employees  who have
  satisfied minimum service and age requirements. Employees may contribute up to
  20% of their  compensation  to the plan.  The Company does not match  employee
  contributions.

                                      -36-
<PAGE>

  NOTE 11.  COMMITMENTS AND CONTINGENCIES

           Operating Leases
           ----------------

           The following is a schedule by year of future  minimum lease payments
  for non-cancelable operating leases at July 31, 1999 (in thousands):

           2000                                                    $1,698
           2001                                                     1,506
           2002                                                     1,155
           2003                                                       794
           2004                                                       557
           Thereafter                                                 409
                                                                   ------
           Total minimum lease payments                            $6,119
                                                                   ======

           Rental expense under operating leases was $2,236,000,  $1,426,000 and
  $810,000 for the years ended July 31, 1999, 1998, and 1997, respectively.

           Contingent Payments
           -------------------

           The terms of certain of the Company's acquisition  agreements provide
  for additional  consideration to be paid if the acquired  entity's revenues or
  results  of  operations   exceed  certain  target  levels.   Such   additional
  consideration  is paid in cash  and is  recorded  when  earned  as  additional
  purchase  price.  The  maximum  amount of  contingent  consideration  that the
  Company may be required  to pay for fiscal  2000 is  $520,000  and  $1,100,000
  thereafter.

           Insurance
           ---------

           In the normal course of business,  the Company may become a defendant
  or plaintiff in various  lawsuits.  Although a successful  claim for which the
  Company is not fully  insured  could have a material  effect on the  Company's
  financial condition,  management is of the opinion that it maintains insurance
  at levels sufficient to insure itself against the normal risk of operations.

  NOTE 12.  SEGMENT INFORMATION

         The Company  adopted  SFAS No. 131  "Disclosures  about  Segments of an
Enterprise and Related  Information" during fiscal 1999. In accordance with SFAS
No. 131, the Company has  identified a single  operating  segment:  the sale and
servicing of hearing instruments and the provision of audiology services.  Sales
are primarily to individual  consumers.  No customer constituted more than 5% of
total revenues. Revenues by country were as follows for the years ended July 31:

<TABLE>
         (in thousands)                          1999                     1998                     1997
                                                 ----                     ----                     ----
<S>                                             <C>                      <C>                     <C>
         United States                          $30,511                  $19,498                 $10,048

         Canada                                   3,248                    2,870                   3,414
                                                -------                  -------                 -------
         Total                                  $33,759                  $22,368                 $13,462
                                                =======                  =======                 =======
</TABLE>


                                      -37-
<PAGE>

  NOTE 13.  SUBSEQUENT EVENTS

         On October 1, 1999, the Company issued  2,500,000  Series B Convertible
Preferred Shares (the "Series B Shares") in a private  placement for $10,000,000
in cash. In connection with the sale of the Series B Shares,  the Company agreed
to  reduce  the  exercise  price  of its  outstanding  share  purchase  warrants
entitling  the  holder  thereof  to  purchase   2,000,000   Common  Shares  (the
"Warrants")  from $12.00 to $6.75 per share,  to extend the  exercise  period to
October 1, 2004,  and to remove the  limitation on the number of shares that may
be issued upon a cashless exercise of the Warrants.  The Corporation also agreed
to  submit  certain  amendments  to  the  terms  of  the  Series  A  Shares  for
consideration  and  approval by the  Company's  shareholders  at the 1999 annual
meeting of  shareholders.  The proposed  amendments to the terms of the Series A
Shares  provide that dividends  payable  thereon may be paid in Common Shares at
the option of the Company until December 24, 2002, and thereafter  only in cash,
and lower the earnings and share price  thresholds to avoid specified  increases
in the dividend rate and as a condition to mandatory  conversion of the Series A
Shares.

         The  Series B Shares  are  initially  convertible  at the option of the
holder on a one-for-one basis into 2,500,000 Common Shares at a conversion price
of $4.00 per share.  The  conversion  rate is subject to  increase to the extent
that the Company's  receivables as of July 31, 1999,  that are collected by July
31,  2000,  total  less than  $4,736,000,  as well as to  adjustments  for stock
dividends,  stock  splits,  recapitalizations,  and  other  similar  events.  In
addition,  until the Company attains specified  quarterly earnings targets,  the
conversion   rate  will  increase   beginning   October  31,  2000,   such  that
approximately 200,000 additional Common Shares would be issuable upon conversion
at that date with  respect to the four fiscal  quarters  then ended.  Additional
adjustments will be made each quarter thereafter as long as the earnings targets
have not been met. The amount of such quarterly  adjustments  will be based on a
factor of 2 percent  of the  original  purchase  price plus the sum of all prior
adjustments  until  November  1, 2004,  increasing  in steps  thereafter  to 4.5
percent  beginning  November 1, 2006.  Once the  Company  has met the  specified
earnings targets for four consecutive fiscal quarters, no further adjustments in
the  conversion  rate will be made. The Series B Shares are subject to mandatory
conversion  at the option of the  Company if certain  share  price and  earnings
targets are met.

         Cash  dividends will accrue on the Series B Shares at an annual rate of
8 percent  of the  conversion  price  then in effect  until  November  1,  2004,
increasing  in steps  thereafter  to 18  percent  beginning  November  1,  2006,
provided that the Corporation has met specified  quarterly earnings targets.  If
the  Corporation  has not met the earnings  targets by July 31, 2002,  dividends
will not accrue or be payable on the  Series B Shares.  Upon  conversion  of the
Series B Shares, any accumulated dividends will be forfeited.

         In September of 1999, the Company  acquired 4 hearing care centers in 2
  transactions  for a total purchase price of $70,000 in cash. Each  transaction
  was accounted for as a purchase.

  NOTE 14.  CANADIAN VERSUS U.S. GAAP

           As  of  July  31,  1999,  1998,  and  1997  there  were  no  material
  differences between Canadian generally accepted accounting principles ("GAAP")
  and U.S. GAAP.



                                      -38-
<PAGE>

NOTE 15.  QUARTERLY   RESULTS  OF  OPERATIONS   (UNAUDITED  -  SEE  ACCOMPANYING
          INDEPENDENT AUDITORS' REPORT)

         The  following is a tabulation of the  unaudited  quarterly  results of
operations for the years ended July 31, 1999 and 1998 (in thousands,  except per
share data):

<TABLE>
                                                                             Quarter ended
                                                        October 31,     January 31,     April 30,       July 31,
                                                            1998           1999           1999            1999

<S>                                                         <C>             <C>             <C>            <C>
Net revenues                                                $  7,701        $  8,486        $ 9,093        $ 8,479
Income (loss) from operations                                 (1,523)           (701)            75         (2,686)
Net income (loss)                                             (1,474)           (699)            65         (2,776)

EBITDA (1)                                                    (1,048)           (187)           637         (1,787)

Net income (loss) per share (basic and diluted)             $  (0.24)       $  (0.11)        $ 0.01        $ (0.46)


                                                                             Quarter ended
                                                        October 31,     January 31,     April 30,       July 31,
                                                            1997           1998           1998            1998

Net revenues                                                $  5,307        $  4,109        $ 5,719        $  7,233
Loss from operations                                             (79)         (1,135)          (778)         (2,906)
Net loss                                                         (96)         (1,085)          (581)         (2,832)

EBITDA (1)                                                       198            (812)          (429)         (2,494)

Net loss per share (basic and diluted)                      $  (0.02)       $  (0.24)       $ (0.10)       $  (0.49)
</TABLE>


---------------
(1)  "EBITDA" is defined as income (loss) from operations plus  depreciation and
     amortization  and is  provided  because  it is a measure  commonly  used by
     acquisition  companies.  It is presented to enhance an understanding of the
     Company's  operating  results and is not intended to represent cash flow or
     results of operations  in accordance  with  generally  accepted  accounting
     principles for the periods indicated.


ITEM 8. CHANGES  IN  AND  DISAGREEMENTS   WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
        FINANCIAL DISCLOSURE

         Not applicable.

                                      -39-
<PAGE>

                                    PART III

ITEM 9. DIRECTORS,   EXECUTIVE   OFFICERS,   PROMOTERS,   AND  CONTROL  PERSONS;
        COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

         Information with respect to the directors and executive officers of the
Company and compliance with Section 16(a) of the Securities Exchange Act of 1934
is  incorporated  herein by reference  to the  Company's  definitive  Management
Information  Circular  and  Proxy  Statement  dated  November  5,  1999  ("Proxy
Statement"),  under the headings "Section 16(a) Beneficial  Ownership  Reporting
Compliance" and "2. Election of Directors."

ITEM 10. EXECUTIVE COMPENSATION

         The required  information  is  incorporated  herein by reference to the
Proxy Statement under the heading "Executive Compensation."

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The required  information  is  incorporated  herein by reference to the
Proxy Statement under the heading "Share Ownership By Principal Shareholders and
Management."

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The required  information  is  incorporated  herein by reference to the
Proxy   Statement   under  the  heading   "Interests  of  Insiders  in  Material
Transactions."

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

         (a)  Exhibits are listed in the Exhibit  Index  beginning on page 42 of
this  report.  Each  management  contract or  compensatory  plan or  arrangement
required  to be filed as an exhibit to this report is marked with an asterisk in
the Exhibit Index.

         (b)  Reports  on Form 8-K.  No  reports  on Form 8-K were  filed by the
Company during the last quarter of the fiscal year ended July 31, 1999.


                                      -40-
<PAGE>


                                   SIGNATURES

         In accordance  with Section 13 or 15(d) of the Securities  Exchange Act
of 1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

Date: November 1, 1999                  SONUS CORP.
                                        By /s/ Brandon M. Dawson
                                                      Brandon M. Dawson
                                           Chairman  and Chief Executive Officer

         In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following  persons on behalf of the  registrant  and in
the capacities indicated as of November 1, 1999.

             SIGNATURE                                          TITLE
PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR:

<TABLE>
<S>                                          <C>
     /s/ Brandon M. Dawson                    Chairman and Chief Executive Officer and Director
          Brandon M. Dawson

PRINCIPAL FINANCIAL OFFICER:

     /s/ Scott E. Klein                       President and Chief Operating Officer
            Scott E. Klein
</TABLE>

PRINCIPAL ACCOUNTING OFFICER:

     /s/ Douglas A. Pease                     Controller
         Douglas A. Pease

A MAJORITY OF OTHER DIRECTORS:


      *HAYWOOD D. COCHRANE, JR.               Director


          * WILLIAM DEJONG                    Director


     * GREGORY J. FRAZER, Ph.D.               Director


        *HUGH T. HORNIBROOK                   Director


         *DAVID J. WENSTRUP                   Director


     /s/ Scott E. Klein
 *By Scott E. Klein, as attorney-in-fact


                                      -41-
<PAGE>


                                  EXHIBIT INDEX


EXHIBIT                            DESCRIPTION OF EXHIBIT
-------                            ----------------------

          3.1 Articles of Incorporation of the Company.
          3.2 Bylaws of the Company. Incorporated by reference to Exhibit 3.2 to
              the  Company's  quarterly  report on Form  10-QSB for the  quarter
              ended January 31, 1999.
         10.1 Securities  Purchase  Agreement  between the Company and  Warburg,
              Pincus  Ventures,   L.P.  ("Warburg")  dated  November  21,  1997.
              Incorporated by reference to Exhibit 99.2 to the Company's current
              report on Form 8-K filed November 25, 1997.
         10.2 Securities  Purchase  Agreement  between  the  Company and Warburg
              dated October 1, 1999.  Incorporated  by reference to Exhibit 4 to
              the Company's current report on Form 8-K filed October 12, 1999.
         10.3 Amended and  Restated  Warrant  Agreement  between the Company and
              Warburg  dated October 1, 1999,  and related  Amended and Restated
              Warrant Certificate dated October 1, 1999.
         10.4 Form of Convertible Subordinated Note.
         10.5 1993 Stock Option Plan. Incorporated by reference to Exhibit 10.26
              to the SB-2.*
         10.6 Second Amended and Restated  Stock Award Plan (as amended  October
              26,  1998).  Incorporated  by  reference  to  Exhibit  10.3 to the
              Company's  quarterly  report on Form 10-QSB for the quarter  ended
              October 31, 1998.*
         10.7 Employment Agreement dated October 1, 1996, between Sonus-USA, and
              Gregory J. Frazer.  Incorporated  by reference to Exhibit 10.28 to
              the SB-2.*
         10.8 Employment  Agreement dated December 24, 1997, between the Company
              and Brandon M. Dawson.  Incorporated by reference to Exhibit 10.30
              to  Post-Effective  Amendment  No.  1,  filed  March 5,  1998 (the
              "Amendment") to the SB-2.*
         10.9 Employment  Agreement dated October 30, 1998,  between the Company
              and Scott Klein.  Incorporated by reference to Exhibit 10.1 to the
              Company's  quarterly  report on Form 10-QSB for the quarter  ended
              October 31, 1998.*
        10.10 Consulting  Agreement effective as of January 1, 1997, between the
              Company  and Hugh T.  Hornibrook.  Incorporated  by  reference  to
              Exhibit 10.33 to the SB-2.*
        10.11 Promissory  Note of Brandon M.  Dawson  dated March 19,  1998,  as
              amended,  and related Pledge Agreement between the Company and Mr.
              Dawson, dated May 1, 1998.*
        10.12 Stock  Purchase  Agreement  dated August 27, 1997,  by and between
              Carissa  D.  Bennett,  Gregory J.  Frazer,  and Evelyn L. Gong and
              Sonus-USA,  Inc. Incorporated by reference to Exhibit 10.35 to the
              Company's  Annual  Report on Form 10-KSB for the fiscal year ended
              July 31, 1997.
        10.13 Stock  Purchase  Agreement  dated  January 5, 1998, by and between
              Gregory J. Frazer, Rhonda Jesperson and Sonus-USA. Incorporated by
              reference to Exhibit 10.41 to the Amendment.
        10.14 Stock Purchase  Agreement  dated February 12, 1998, by and between
              Gregory  Frazer,  Donald M. Welch and Sonus-USA.  Incorporated  by
              reference to Exhibit 10.42 to the Amendment.
        10.15 Noncompetition   Agreement   dated   January  25,  1999,   between
              Sonus-USA, Inc. and Gregory J. Frazer.
        10.16 Amendment Agreement effective as of August 1, 1998, by and between
              Sonus-USA, Inc. and Gregory J. Frazer.
           21 The  Company's  subsidiaries  are  SONUS-USA,  Inc.,  a Washington
              corporation,  Sonus-  Canada  Ltd.,  a British  Columbia  (Canada)
              corporation, Sonus-Texas, Inc., an Oregon corporation, and Hear PO
              Corp., a New Mexico corporation.
           23 Consent of KPMG LLP.
           24 Power of attorney of certain officers and directors.
           27 Financial Data Schedule.
           99 Description of capital stock of the Company.

-----------

* Management contract or compensatory plan or arrangement.


                                      -42-